The USD/JPY has captured headlines in the FX markets after the currency pair tumbled beneath October lows and continued to head south before bottoming just below the psychological 85 level. As we cautioned previously, a movement below our past 1st tier uptrend line could result in an ensuing selloff, and it appears the damage may be done for now. The USD/JPY registered 5000+ volume for the first time since the selloff in July 8th. While such a sell-side bias is certainly disconcerting, investors should also keep in mind that the USD/JPY experienced a nearly 7% rally over the next month after hitting these July 8th levels. Therefore, it will be interesting to see if the USD/JPY can stabilize from today's lows and pursue a similar rally until the end of the year. That being said, we will have to see how far investors decide to go with negative news from Dubai.
As most investors are well aware of by now, Dubai World is requesting a debt restructuring of what could be up to $80 billion of credit. Although actual losses incurred are presently unknown, some European and UK banks could have considerable exposure. This week's news concerning Dubai's debt has shocked FX and equity markets as investors worry that the development may indicate forthcoming problems from other emerging economies. As a result, Asian markets have been under intense selling pressure, and European/U.S. equities look set to open sharply lower. Meanwhile, the FX markets are experiencing a broad based appreciation of the Dollar and Yen as gold crashes back below $1150/oz. In other words, investors have received a psychological trigger sending money towards risk averse investment vehicles. As one can see, investors continue to favor the Yen over the Dollar as a safe haven.
While investors already preferred the Yen as a safe haven, stronger than expected data releases from Japan have only fueled the USD/JPY's downturn. Japan's Trade Balance came in much stronger than expected earlier this week in addition to positive Household Spending, CPI, and Retail Sales reports late Thursday EST. Hence, the global economic recovery has helped Japanese exporters recover, resulting in job creation and rising personal consumption. A recovering Japanese economy is beneficial to the Yen and allows investors to send the USD/JPY lower. Naturally, Finance Minister Fujii is upping is rhetoric concerning a looser monetary policy from the BoJ. Therefore, it seems the bottom set today may result from investors speculating that Japan will intervene in the currency markets should the Yen strengthen any further against the Dollar. After all, all-time lows are getting much closer and the BoJ's patience has to be wearing thin. As we recall, some major Japanese companies reliant on exports, such as Toyota, signaled that 90 is their breaking point in the USD/JPY. Hence, this week's deterioration in the currency pair could put a lot of pressure on the DPJ to take action.
Technically speaking, 85 appears to be the new psychological benchmark with 90 hanging far overhead. It's a bit troublesome to place supports on our chart right now due to limited historical reference. However, we can tell you that the 82.50-85 area proved to be a strong support area during the Spring/Summer of 1995. Therefore, the USD/JPY could experience similar support should the currency pair's present downturn continue. As for the topside, there are multiple downtrend lines serving as technical barriers as the long-term downtrend bears down on price. Therefore, the USD/JPY will likely need strong support from the bulls to stage a noteworthy rally.
Present Price: 86.29
Resistances: 86.34, 86.57, 86.81 87.04, 87.22, 87.46
Supports: 86.20, 85.99, 85.74, 85.51, 85.22, 84.84, 84.60
Psychological: 85, 80, 90