Long Term Base Forming on USD/JPY

Wednesday, 3 November 2010 

Earlier in the week, we discussed how we believe that price action in the USD/JPY currency pair has come to an abrupt halt. We called for a reversal in the pair - however we also pointed out the possibly risk that the currency pair might head lower from current levels and breach support (which is also at the monthly low) to break through 80.00.

To cut a long story short, we believe that this could still be the case. However, we also believe that the price action on the USD/JPY pair is showing that the pair is nearing a medium to long term bottom.

Momentum has been lost recently, and we have not seen the continuation of the decline that we called for at the end of last week. In fact, if anything - all we have seen is a whole lot of sideways movement in the last 48 hours - which may reiterate the mood conveyed by indicators wuch as the RSI.

The RSI is showing that the USD/JPY currency pair is severely oversold, and therefore we believe that the current state of the pair is a state of consolidation and decision making. Investors are essentially waiting to see what the Fed does in terms of quantitative easing measures in the next 24 hours - and are therefore sidelined when it comes to trades with the important crosses such as the USD/JPY.

It should be noted however that the above is stated for the medium to longer term time frame. For the shorter term - we are still unsure as to where the currency pair might head. It could indeed be, as we predicted last week - that the pair might return to seek out a new low below 80.00. Alternatively, the possibility of a rally from here is always on the cards, and the idea that we might already have set a yearly low on the currency pair is always in the back of our minds.

Despite this - it needs to be said that we have made this prediction before - and been sorely disappointed. After all, the threat of intervention in the USD/JPY currency pair has all but been taken off the table - and therefore we believe that the case for a rally is stronger than ever before.