The daily chart of USD/JPY has formed a “pinbar”, (also known as a Dragonfly Doji) twice in the past week, an indication to me that the trend for yen strength against the dollar is about to come to an end and reverse to one of weakness.

Very aggressive traders also had the chance to buy USD/JPY at a test near the recent support, which is another way of saying there was an excellent chance to buy low, something which is essential in any form of trading.


As you can see on the chart, the first pinbar formed six days ago after a decline which took the pair from a high of 97.78 to a low on 88.23, or 955 pips.

If you had decided to buy at the closing price, the stop for that trade would have to be somewhere below where the support had been established. Why? Because when you’re long, so want to avoid getting stopped out where you know buyers have existed in the recent past. Since the low for that day was about 40 pips below the close, in order to be safe a stop of 70 to 80 pips was the minimum amount needed to hold this trade.

What you also could have done was to try and wait for price to return to or near the support level, the area where you know buyers had recently come into the market, which is exactly what happened 4 days later. I took the third option, which was to buy near the close of that day.

There’s a very strong fundamental reason to believe that the dollar will gain on the Yen over the next few days and weeks; after the G7 meeting in Istanbul last week, Japanese Finance Minister Hirohisa Fujii indicated Japan could intervene for the first time since 2004.

“If currencies show some excessive moves in a biased direction, we will take action,” Fujii said Oct. 3, an apparent shift from his statement a month ago when he opposed seeking a “weak” yen.

Fujii, who took power last month, at the time said he opposed stepping into the foreign-exchange before revising that comment to say he wasn’t an advocate of a strong currency and that Japan was open to acting should the market move “abnormally.” Fujii said that his early comments about the yen “have been a bit misunderstood,” and added that currencies should be set by markets.

Japan hasn’t intervened since selling 14.8 trillion yen ($164 billion) in the first quarter of 2004. Fujii oversaw more than 1.3 trillion yen ($15 billion) of yen sales during his previous stint as Finance Minister from August 1993 until June 1994.

For a nation like Japan, whose GDP is relatively dependent on exports, a stronger currency naturally makes its exports more expensive (and therefore less competitive), something which is especially dangerous now given current economic conditions. Canon, the country’s biggest maker of office equipment, estimates every 1 yen appreciation against the dollar will lower its second-half operating profit by 4.2 billion yen.

This situation is a bit more complicated by the fact that Japan’s major auto manufacturers (Toyota, Nissan and Honda) all manufacture cars in the U.S., Japan’s largest export market and by the fact that major corporations routinely hedge against adverse currency exchange movements. Firms can get burned even if the hedge however. This likely happened to U.S. airlines, who probably were trying to protect themselves from higher fuel costs as the price of oil plummeted from $147 to around $60 after July 2008.

Yukitoshi Funo of Toyota said 90 yen to the dollar was “painful” in late September and called for the currency to weaken.

The way I see this trade going, a break of 90.40 can take the pair to the next resistance level around 91.50, so this will be my first target for this trade.