The rapid sell-off in the U.S. Dollar has led to a spike higher in the September Japanese Yen. The current rally is threatening to take out a pair of tops. This action could trigger an acceleration to the upside. On Tuesday, the contract took out the July 26 top at 1.2854 without much fanfare. The market stopped at 1.2870 which was short of the June 1 top at 1.2895.
Overnight, the contract is trading inside of the previous day’s range. This usually indicates impending volatility. On the downside, support comes in at 1.2760 and 1.2703.
While the charts indicate a potentially explosive upside rally, fundamentally, the high prices are no doubt stirring the attention of Japanese officials who may try to try to nurse the Yen lower with a verbal intervention.
These same concerns have reached UBS who downgraded Japan to ‘underweight’ in its global model portfolio. They decided to downgrade the country because they believe that additional QE3 will weaken the dollar and continue to underpin the Japanese Yen. This will “frustrate efforts to weaken the Yen, a clear negative for corporate Japan” according to the UBS report.
On Thursday, the U.S. Federal Reserve may announce another round of stimulus. This could cause a spike in the September Japanese Yen against the U.S. Dollar, prompting Japanese officials to take some kind of action to prevent the currency from running away to the upside.
Traders should keep an eye on the Japanese Yen this week because of the possibility of expanded ranges and increased volatility. Although an actual intervention is not expected at this point, an aggressive campaign of verbal interventions could stop the current rise, but no one expects to see this until the Fed lays out the groundwork of its plan for additional quantitative easing.
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