Don’t Miss the FX Train


Don’t Miss the FX Train
Sunday, December 14, 2008
By Adam Perl

The auto-industry took center stage last week, as spectators waited anxiously for the senate’s bail-out decision. The major movement in the markets came on Friday, as the senate previously rejected the proposal, forcing treasury to step in and take charge. Treasury’s involvement came after a dispute between Republicans and Union workers, regarding future salaries. The Republican Party demanded salary cuts due to the vast financing, demanding that future salaries would be in line with Japanese car makers. During early morning hours on Friday the deal exploded as neither sides managed to come to an agreement, forcing other bodies to intervene.
On a day to day basis, experienced traders will often find an individual stock or a security that presents extreme movement during the intraday session- a movement that is caused due to news events or economic data. During Friday’s session General Motors received that role, regaining strength from a 40% drop at the start of the session, to close down by only 4.37%. On the currency market the Dollar/Yen pair made an amazing turnaround, forming a candlestick that is rarely seen on the FX market.
Japanese Yen
For over a decade Japan has been combating slow growth along with additional economic problems, forcing the central bank of Japan (BOE) to keep a low policy fund rate of only 0.5%. The low rate presented investors and money borrowers over the years with excellent trading opportunities, selling the Japanese Yen while buying high yielding currencies, such as the U.S Dollar. Since the start of 2007, monetary policies of global banks have flip-sided, as central banks have slashed their rates to try to control deteriorating economies. What started off as a minor correction, turned out to be a mega-downtrend as borrowed money fled back to its origin, sending the Japanese Yen Index up over the last year, by over 36%.

An economy that had been struggling to keep up with its western neighbors, thriving on their consumptions, received a major blow, when a combination of a slowdown in consumer spending and an evaluating domestic currency affected Japan’s major source of income- its exports.
To date, the financial situation and global market structure has reached such extremes that G7 and government officials in Japan our now ready to act, possibly intervening, preventing the currency from evaluating even further. U.S citizens, who were once classed as major consumers of Japanese goods, are now allocating a fair amount of their income to savings, rather than spending, therefore causing a chain reaction throughout the various economies, including Japan. When taking a glance at the chart below one can easily see by comparing the S&P 500’s performance to that of the Japanese’s Yens the negative correlation between U.S consumption and the Japanese Yen. The S&P 500 is used in this comparison as stocks are normally a major part of consumer purchasing, during stable times.

A possible reversal?
Over the last couple of weeks traders have become accustomed to a situation where headlines are driving the markets forward. On Friday the USD/JPY pair dropped to its worst level since 1995. Similar to the price action on auto-industry stocks, signs of a possible bail-out from other officials sent this pair rallying, regaining a majority of its intraday losses. After breaking October’s low, a level also know as a psychological barrier due to the price of ¥90, this pair rallied to close the session above support. Even though the candle didn’t form a classic “hammer”, buying power was seen through the shape of the candle and through the intraday movement. To date this pair is trading at a critical junction, where good news from the U.S could drive it higher to targets mentioned on the chart below, while further disappointing news will surely send it to 1995’s prices. With a wave of economic data coming out this week and investors eyeballing the outcome of the bail-out plan, traders should watch out for a confirmation candle or a clear break of current support.

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