USD/JPY Drop Temporarily Stalls

Tuesday, 26 October 2010

As many traders of the USD/JPY will know, the currency pair set fresh 15 year lows overnight (actually just before the opening bell in Japan) at just above 80.00. Still however, the currency pair has not plunged below this pivotal 80.00 level - however we do not believe that it will be long before it does so.

The USD/JPY has been under a huge amount of technical pressure, recently. First of course - all technical analysts have felt the pinch of the comments out of the G-20 summit over the weekend, stating that it is desired that no countries intervene in their currency markets for now. Japan agreed with the move; however it should certainly be noted that Japan's agreement does not solidify the stance that intervention by the Japanese Foreign Ministry is now "unlikely".

We still believe that intervention is an ever present risk with the USD/JPY. Thus, when we are considering technical strategies to trade the currency - we always need to keep in mind the upside possibility of intervention.

Currently, the USD/JPY has bounced off the low of the session - sitting at around 80.98 - which is just below where it opened 24 hours ago. Technical's are mixed, however there are a few important considerations you should take in to account before placing a trade in this currency pair.

Firstly - the RSI is indicating that the USD/JPY currency pair is significantly oversold - on almost all time frames. This often only happens on one or two - but not the 5 time frames that we looked at (including weekly).

A market is oversold according to the RSI when the reading on the indicators drops below 30.00. Currently, it is at 29.69 on the daily chart.

Additionally, all of the moving averages that we were looking at are pointing downwards. This would appear to contradict the RSI by indicating more downwards pressure on the currency pair. However - we are currently reading this the other way. Because literally all of the moving averages are pointing downwards - we believe that a shift in market dynamics might be in order.

Here, coupled with a guiding hand by the Japanese central bank, we could see the currency pair returning to the 85.00 level before plunging lower. We truly believe that the USD/JPY will cross the 80.00 barrier in the medium term; however we also believe that the currency pair is in need of a small correction to correct momentum and technical studies - before ploughing on further downwards.