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Foreign Exchange

FX research roundup: Yen views the same, but technically different

A couple of pieces of this week confirms that technical analysis is often little more objective than the gut feeling of old-timers.

Bank of America Merrill Lynch’s newly hired technical strategist, MacNeil Curry, published a piece headed ‘JPY bears living on borrowed time’. Curry says: “Japanese yen weakness has been one of the stronger themes in FX as of recent [weeks]. However, we think this trend is running out of steam. With USD/JPY and EUR/JPY approaching range highs and US rates markets vulnerable to a further bullish squeeze, we look for topping in USD/JPY and EUR/JPY before trading back towards the low end of their larger ranges.”

Curry sees USD/JPY running out of steam between 84.50 and 85.00 and then selling off to test trendline support (currently at 81.43) for a potential “resumption of the bear trend for the 1995 lows and below” with a level of 77.50 in mind.

George Davis, RBC’s chief technical analyst, looked at exactly the same chart as Curry but came to a bullish rather than bearish conclusion. Davis sees a bullish trend reversal was made, “above 82.58 last week, corroborating a break above the Ichimoku Cloud top at 82.35. The next level to watch is the double top from November-December at 84.40. A daily close above this level would resolve a three-month trading range to the topside, exposing 85.91 thereafter. Support at 83.11 and 82.35 is now expected to attract buying interest – with a close below 81.45 required to generate a bearish trend reversal.”

The currency researchers at Bank of Tokyo Mitsubishi come at it from a more fundamental angle and have sided over the past couple of days with the Davis’ USD/JPY bull view.

BoT’s Derek Hardman believes that the “Fed minutes from the 25th-26th FOMC meeting revealed a modestly upgraded outlook for the US economy, which should help to support the recent move higher in USD/JPY at the margin.” That might be so, but the market will be focusing on any clues in Bernanke’s speech to the G20 this afternoon. Hardman also points out that strong demand for Japanese money market securities in January, which “could have been a key factor behind the yen’s failure to weaken in line with widening yield differentials between overseas and Japan earlier this year”, has recently reversed with two consecutive weeks of net selling, which will help ease yen demand.

Hardman’s colleague, Derek Halpenny, also sees yen negatives in the Japanese political scene. In a piece called ‘Japan political risks rising’, he focuses on the likelihood of Prime Minister Kan having to call an early general election after opposition to consumption tax raises and the potential breakaway of 16 members of Kan’s ruling Democratic party. Short term, the FX implications are unclear, but Halpenny sees the situation as heralding an eventual breakdown of Japan’s two-party political system: “Earlier this month there were a record number of landslide victories for independent candidates in local elections that underline disenchantment with the two major parties. Indeed in a recent poll two-thirds of respondents claimed to support no party.” Halpenny doesn’t think that a premium for Japanese political fragmentation is yet priced into the yen price.

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