After an early sell-off nearly triggered a breakdown through a level not seen since June on Friday, the December Japanese Yen reversed to the upside to finish higher for the session. It was a strong move on the daily chart, but the market still finished lower for the week.
The Yen is trading higher in Monday’s session but it has not exceeded Friday’s high at 1.2585. A move through this level is likely to trigger additional short-covering. Last Friday’s rally which was the Japanese Yen’s biggest one-day gain in two months was fueled by increased demand for higher risk assets.
A number of events today could trigger a follow-through rally. These include a shut down of U.S. stock markets, Spain’s Q3 GDP report and Germany’s employment report. Later this week, the U.S. will announce its late employment data. The Bank of Japan is scheduled to meet on Tuesday.
With the Euro Zone economy showing no sign of strengthening, the Japanese Yen may be underpinned over the near-term as investors are likely to continue to shed risky assets in favor of the lower-yielding Yen. Traders will be monitoring the economic reports and activity in Spain and Greece for any shift in sentiment.
The BOJ is feeling mounting pressure from nervous politicians to ease further following last week’s weak consumer prices report. The drop represented the fifth-straight month of declines, leading some BOJ board members to say that the central bank’s 1 percent inflation target is unattainable. The consensus among economists surveyed by Bloomberg is for additional stimulus.
Expectation is for the BOJ to increase its asset-purchase program by about 10 trillion yen ($125 billion). Flooding the market with additional Yen should fuel some fresh selling pressure. Additionally, the Commodity Futures Trading Commission’s Commitment of Traders Report suggests that the number of net shorts is greater than the number of net longs by the tune of 18,196 to 10,086. This shows the market is being controlled by short traders, however, if the BOJ doesn’t ease as much as expected or at all, the market is ripe for a short-covering rally.
Technically, the December Japanese Yen stopped at 1.2444 before mounting a strong surge to the upside. Shorts may have pulled in profits or fresh longs may have entered as the market approached the June 25 bottom at 1.2438.
Whatever the reason behind the bottom, the market did form a closing price reversal bottom. Typically this type of chart pattern leads to a 2 to 3 day rally equal to at least 50% of the last break. Based on the short-term range of 1.2836 to 1.2444, the first upside objective is 1.2640 to 1.2686. The key is the breakout over Friday’s high at 1.2585. Unless the market breaks out above this price with authority, it could just drift sideways.
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