USD/JPY: Understanding the Erratic Price Action

Last updated 5/11/2009 10:36 AM ET (GMT -5) 2 Comments

Kathy Lien

Director of Currency Research, GFT

Over the past two weeks, reversal of recession trades have pushed the U.S. dollar and Japanese Yen lower. However today's lack of economic data from the U.S. has led to profit taking in the currency market. However the correction is most likely a pause before further gains because rarely do we see a rally that moves in a straight line. We need to let some of the steam out of the rally in the EUR/USD and other major currencies before we can pave the way for further gains. Higher yielding currencies have become very overbought against the U.S. dollar.

The correction in U.S. equities and profit taking has contributed to the sell-off in most of the major currencies but other factors are driving USD/JPY lower. The currency pair failed to participate in the risk rally on Friday and has instead fallen 300 pips over the past 2 trading days.

What's Behind the Move in USD/JPY:

There are a number of different factors impacting the move in USD/JPY.

1. Exporter Selling USD/JPY failed to participate in the rally on Friday because exporters are aggressively selling USD/JPY. According to the Nikkei newspaper, many Japanese exporters including Toyota, Honda and Sharp have assumed a 95 USD/JPY rate for the books for the fiscal year. The recent rally in the currency pair has encouraged them to "lock in" forward cover at current levels.

2. Prospect of More Stimulus from China - There is no question that we need both China and the U.S. to carry the global economy out of recession. China has targeted 8 percent growth this year and in order to acheive it, we have predicted that more stimulus will rain down on the Chinese economy. This weekend, Premier Wen Jiabao emphasized that the 4 trillion yuan plan announced last year was simply a part of the government's overall policy effort and new measures will likely emerge steadily throughout the year. As Japan's number one trade partner, more stimulus for the Chinese economy will help the Japanese economy.

3. Correction in U.S. Equities - The rally in U.S. equities did not help USD/JPY on Friday but this morning's sell-off is exacerbating the currency pair's decline. This indicates that dollar bullishness is really dominating the currency pair and therefore the move in USD/JPY is just a derivative of that.

On a technical basis, USD//JPY is approaching very critical levels. We have a major head and shoulders pattern in place, the currency pair is attempting to enter the sell zone according to our Bollinger Bands and is approaching trend line support. A close below 96.80 would open the door for a significant slide.

Comments (2)

David

May 12, 2009 at 03:45 AM ET

many Japanese exporters including Toyota, Honda and Sharp have assumed a 95 USD/JPY rate for the books for the fiscal year.

are you saying that they won't stop selling until the price hit 95 USD/JPY?

klien

May 12, 2009 at 08:33 AM ET

Since they are exporters, they want to hedge against a stronger Yen. So when USD/JPY hit 95, they were selling USD/JPY to lock in the exchange rate. The higher it goes, the more they may want to hedge

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.