There are several important market developments grabbing headlines: the bull market in US stock, decline of precious metals and sharp fall in the Yen. All of them are big, but from the perspective of this blog, what happens in currencies is of primary consideration. That is why the Japanese Yen receives more attention than other stories, especially since it continues to get weaker, having easily broken the 100 threshold. After clearing this psychological resistance, the USD-JPY swiftly reached 103, with, seemingly, no end in sight.
In the past few days, many analysts started to issue warnings about this rally, but for other reasons. Yields on Japanese government bonds experienced a sharp uptick in the past couple of weeks, reaching as high as 0.865%. That is almost double the yield of 0.444% in early April. Some market observers are beginning to think that soon the yields may reach levels high enough to become attractive to income seekers. At some point, we could have a situation when the Japanese Yen is a target of the carry trade and not the funding currency. It would mark a dramatic change to what we have been used in the past decade or so, although this line of thinking is probably premature.
This 5-year chart of 10-year JGB shows that current yields still have some distance to go before they become truly attractive. Even in this global low-yield environment, we would have to see the JGB at about 2% or higher before there is a rush of new buyers. Besides, that would not necessarily translate into much higher short-term yields, the driver behind the carry trade. It is unlikely for the Yen to reverse direction (become stronger) on these basis, even if such scenario is intriguing and worth keeping in mind for possible future consideration. For the time being, a rebound in the Yen (certainly possible) would be for other reasons, mostly technical.
Commodity currencies have also been under severe pressure lately. While the Aussie received most of the spotlight, the Kiwi is just as weak. In fact, over past couple of sessions, it appeared to be the laggard of this group, suffering the biggest loss. Closing at 0.8061 on Friday, the NZD-USD is approaching the 0.80 handle, a technical and psychological objective for this market swing. This suggests a strong possibility of rebound or at least consolidation within the downtrend.
I will look for a short-term rebound in this pair once the markets open, similar to the trade in the EUR-JPY last week, only in opposite direction. Initially, I would like to see a downside continuation, followed by a bullish reversal candlestick pattern on the hourly chart during first few hours of trading. The objective here would be in the range of 30-40 pips, modest amount, but in line with general volatility of this pair. In addition, the AUD-USD and several other pairs present similar technical picture and are candidates for trades based on these principles.
Another currency pair of immediate interest is the popular beast. Its hourly chart has formed a base, bullish pattern within the uptrend, with the key resistance at 156.75. If the price moves above this obstacle, we can expect an upward continuation of at least 100-120 pips. However, I will avoid the trade if the GBP-JPY moves higher immediate after the open, as these early moves have a higher probability of failure. In addition, I am on a lookout for opening gaps, which often present decent trading opportunities. Have a great trading week!
Mike K.