USD/JPY Weekly Technical Forecast (SEP 13-17 2010)

The internal elections in Japan’s ruling party are the main theme this week, among other events. Here’s an outlook for the Japanese events and an updated technical analysis for the falling USD/JPY.

USD/JPY daily chart with support and resistance lines marked. Click to enlarge:



There has been a lot of talk about an intervention to weaken the yen. Only a coordinated intervention can have a long term effect. Will it happen this week? Or will the talk continue? Let’s start:

1. Revised Industrial Production: Published Tuesday, 4:30. Japanese industrial output showed a modest rise of 0.3% according to the initial release. This came after a drop of 1.1% drop in the previous month. The rise will probably be confirmed now.


2. Leadership elections: Tuesday. The Japanese prime minister, Naoto Kan, has been in office only for a few months, and is now challenged by Ichiro Ozawa,  a veteran politician. Mr. Ozawa raised the issue of the strong yen many times during his election campaign and put it high on the agenda. A victory by Ozawa means yet another prime minister for Japan, the third this year. Political uncertainty and the vow to fight the strong yen may hurt the yen. A victory by current PM Kan will boost the yen.


3. Tertiary Industry Activity: Published Wednesday, 23:50. This services sector indicator is a good gauge for the Japaneses economy. The past two months shows a decline of 0.9% and 0.1%. A rise of 0.7% is expected this time.


4. Masaaki Shirakawa talks: Begins speaking on Thursday, 6:00. The governor of the BOJ will speak at a conference in Tokyo and is likely to mention the high level of the yen. If he reiterates the words from previous appearances, the market will dismiss it. Only firmer talk can move the currency.

All times are GMT.

USD/JPY Technical Analysis

USD/JPY began the week by dropping lower, setting a fresh 15-year low at 83.34. It didn’t stay there too long and gradually climbed higher, to close at 84.16.

84.80, which was a support line in August and also a swing low in November, now serves a strong resistance line. Above this line, the next line that will cap the dollar in case of surge is the 86.30 line which was a support line twice in July.

Higher, 88 was a cushioned the pair in October, March and May. Higher, there are two lines close to each other – 89.15 was a resistance line in July and a support line in May, and 89.75, a weaker line, which provided support in March.

Downtrend channel – the recent descent of USD/JPY is characterized in an imperfect downtrend channel – the downtrend resistance was formed from the 89.15 line and continued with two perfect touches. The downtrend support that was formed earlier (in June) served as perfect support three times since then, but was also violated briefly once.

I am bullish on USD/JPY.

The talks about intervention are mounting – while they have proved fruitless up to now, there’s a chance of an intervention due to the depth this pair reached, and the internal political tensions that the currency is causing in Japan. Only a globally coordinated intervention will have a big long term impact.

EUR/USD Pusing Forward to Touch 1.27..

EUR/USD continued pushing forward and touched 1.27. At this point, it seems that the heights aren’t easy for the pair, that still carries debt issues and gloomy forecasts. Update on this pair.

Euro/Dollar continued the trend that began with the weak Non-Farm Payrolls on Friday and gradually edged up during the week – from the support line of 1.2460, it rose in waves and reached 1.2702, breaking 30 pips above the 1.2672 peak it reached on May 21, in the recovery rally that followed the turmoil.

So, at this point, the highest since the beginning of May, the pair seems exhausted. EUR/USD fell back down to 1.2660 after reaching the new highs. The break seems false and the next line of resistance, 1.2880 is out of reach. 1.2880 was a support line in May 2009.

Below 1.2460, support appears at 1.2330, 1.2250 and most importantly 1.2150. Above, 1.3110 is the next resistance line.

Reasons for Euro rally

The recent Euro rally came on top of weak economic figures in the US, and especially the Non-Farm Payrolls, that disappointed two months in a row. The sentiment is that the US economic recovery is much weaker than expected, meaning low interest rates for a very extended period of time. With a weak US economy, how can the dollar rise?

But there’s something else: the risk factor. The Euro didn’t rally on its own strength, but on US weakness. US weakness is global weakness, and this will eventually trigger risk aversive trading.

The situation in the Euro-zone isn’t good. The European teams might be good football / soccer, but their economies aren’t doing well.

Top economists say that the worst is yet to come:

Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto, said the euro will depreciate to $1.13 in the third quarter, $1.08 by year-end and may near $1 in 2011 before recovering. Osborne, whose predictions were within 4.1 percent of the mark on average, according to data compiled by Bloomberg, was echoed by the nine following most-accurate forecasters in anticipating a lower euro in the next two quarters.

When fear will return to the markets, the Euro will suffer. The dollar and the yen will rise. So, if you’re enjoying this current risk rally, you better watch out before the tables turn once again.

GBP/JPy Daily Technical Forecast (May-24-2010)

As you can see on my h1 chart below, the GBPJPY slipped above the bearish channel indicating a serious threat to the bearish scenario but price so far unable to move consistently above the channel. Although nearest term pressure is now more to the upside, price still trapped in range area of 130.80 - 128.00. We need a clear break above 130.80 to continue the bullish scenario testing 132.80 region. On the other hand, Break below 128.00 could resume the major bearish scenario testing 126.75 region.

GBP/JPy Daily Technical Forecast (May-24-2010)

As you can see on my h1 chart below, the GBPJPY slipped above the bearish channel indicating a serious threat to the bearish scenario but price so far unable to move consistently above the channel. Although nearest term pressure is now more to the upside, price still trapped in range area of 130.80 - 128.00. We need a clear break above 130.80 to continue the bullish scenario testing 132.80 region. On the other hand, Break below 128.00 could resume the major bearish scenario testing 126.75 region.

How to Trade Gold and USD Correlations??

Almost all forex traders know that Gold and US Dollar markets move against each others. It means when gold price goes down, USD goes up and visa versa. Therefore USD and gold are highly correlated and their correlation is even stronger and more reliable than the correlation that different currency pairs have. Now the question is if this strong correlation can be used in trading either gold or USD or both. The answer is yes. Gold and USD prices move against each other. When gold forms a buy signal, USD forms a sell signal, but the good thing is that sometimes the signals that one of them forms is ahead of the other one and so it can be used as a leading indicator to trade the other one.

The below chart shows the USD and gold price at the same time. As you see there are many cases that a support/resistance level breakout in gold is followed by a resistance/support level breakout on USD and visa versa. There are also many cases that they form an opposite signal almost at the same time, but even in those cases their signals can be used as confirmation to trade either gold or USD.



How to Trade Gold and USD Using the Gold-USD Correlation?

First, you have to open both gold and a USD cross currency pair (like USD-CHF) price charts on your trading platform at the same time. Both of the price charts have to be set to the same time frame, for example one hour. Then you have to analyze both of the price charts, based on the trading system that you have. For example I use support/resistance breakout. So all I have to do is finding a support/resistance line on one of the gold or USD-CHF price charts and waiting for the breakouts. Sometimes you can find a resistance line on gold, but you can not see any visible support line on USD-CHF. However, the resistance breakout on gold will be followed by a sell signal on USD-CHF and so when gold goes up, USD-CHF goes down. The resistance breakout on gold can be used as the confirmation of the sell signal on USD-CHF and visa versa. So you can trade any of them that you like, while you have a confirmation from the other one. Lets look at some examples.

On the below chart, a resistance breakout and so a buy signal formed on the gold one hour chart. While there is no special support line on USD-CHF price chart, it formed a strong sell signal by the candlesticks and went down strongly. Trade setups like this occur almost everyday on different time frames.



The below chart shows a case that a support breakout and so a sell signal formed on gold price chart, several hours before the resistance breakout on USD-CHF. A support breakout formed on gold 4 hours chart by 2010.01.12 20:00 candlestick. Although it went up to retest the broken support line, it finally formed a sell signal below the broken support line and also the Bollinger Middle Band by 2010.01.14 4:00 candlestick and started going down strongly. At the same time USD-CHF started going up too, but it broke above its only visible resistance line on the price chart, about 4 days after that.