Fundamental Forecast for Japanese Yen: Neutral

Direction from the Japanese yen is often the product of risk appetite; and the fundamental outlook for next week doesn’t suggest this essential correlation will break any time soon. However, this connection may actually complicate the future for speculators rather than make it more straightforward. The primary source of what has essentially been a market-wide advance in risk appetite these past two weeks seems to have petered out. Earnings releases are in decline and there are very few individual releases on the docket that can initiate a global shift in sentiment on its own. Among other potential catalysts – like growth speculation – there are many contingencies and shades of gray that could make the yen a very difficult currency to trade going forward.

• Euro, British Pound Remain in Consolidation Mode vs. US Dollar
• Commodity Dollars Surge as Canadian, New Zealand Data Surprises to the Upside, FX Carry Trades Gain
• Swiss Franc Remain Range Bound vs. Euro as Data Highlights Swiss Deflation Risks

US Dollar, Japanese Yen To See High Volatility on Tuesday Amidst Goldman Sachs (GS) Earnings, US Retail Sales

The US dollar and Japanese yen both took a hit on Monday and ended the day as the weakest of the majors thanks to a surge in risk appetite that took the DJIA and S&P 500 up more than 2 percent.  Economic data certainly did not drive these moves, as the release of the US budget statement was disappointing with the deficit hitting $94.3 billion in June, bringing the deficit for the fiscal year to $1.1 trillion. Instead, FX carry trades and equities were driven higher as speculation mounts that Goldman Sachs earnings for the second quarter will indicate that the firm made huge profits, painting a brighter outlook for the financial sector as a whole. While a large increase in profits is sure to ignite significant risk appetite, these optimistic expectations are bordering on the extreme, creating potential for disappointment and high volatility. This makes it important for traders to be careful with the amount of capital they put on the table.

Forex traders may also notice choppy price action upon the release of US advance retail sales, which are projected to rise 0.4 percent for the month of June, which would mark the second straight improvement, and excluding autos, retail sales are anticipated to increase by 0.5 percent. However, there is potential for a worse-than-expected result, as the International Council of Shopping Centers (ICSC) said that same-store sales tumbled 5.1 percent in June from a year earlier, which was the sharpest decline since March. All told, a negative reading has the potential to stoke risk aversion in the markets, and thus, US dollar strength. On the other hand, surprisingly strong results could offer a boost to FX carry trades and equities.

Related Articles: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

Euro, British Pound Remain in Consolidation Mode vs. US Dollar

The euro and British pound were mixed on Monday, but from a longer-term perspective, pairs like EURUSD and GBPUSD remain range bound and we have yet to see any sort of directional break. On Tuesday, the UK consumer price index may reflect lessening price pressures for the month of June. Indeed, the annual rate of CPI growth is forecasted to fall to a nearly two-year low of 1.8 percent from 2.2 percent, keeping inflation within the central bank’s acceptable range of 1 percent - 3 percent, but below their 2 percent target. If CPI falls more than projected, the British pound could pull back sharply as the markets will anticipate that the BOE will expand their quantitative easing efforts even further in August. On the other hand, if CPI holds strong, the currency could rally in response. Ultimately, though, a breakout in EURUSD and GBPUSD may have more to do with a directional move in the US dollar, as the currency has just treaded water since the beginning of June.

Related Articles: Euro Weekly Trading Forecast, British Pound Weekly Trading Forecast

Commodity Dollars Surge as Canadian, New Zealand Data Surprises to the Upside, FX Carry Trades Gain

The Canadian dollar and New Zealand dollar were the strongest currencies of the day while the Australian dollar trailed close behind as carry trades benefited from increased risk appetite. Meanwhile, Canadian and New Zealand economic data was surprisingly strong. First, New Zealand sales rose 0.8 percent in May, and excluding autos, spending rocketed 1.6 percent, which was sharpest increase since February 2007. The results suggest that the New Zealand economy is holding up rather well and that there is no need for the Reserve Bank of New Zealand to cut rates any further. In Canada, surveys published by the Bank of Canada reflected positive sentiment on the business outlook, and slight improvements in lending conditions. Indeed, the business sales outlook index surged to a nearly 10-year high of 38.0 in Q2 from -22.0 in Q1 as a greater number of firms anticipate increasing sales volume over the next 12 months. Adding to the mix, the Senior Loan Officer Survey showed that lending conditions remain tight, but to a lesser degree than what loan officers saw in Q4 2008 and Q1 2009.

Swiss Franc Remain Range Bound vs. Euro as Data Highlights Swiss Deflation Risks

The Swiss franc was mixed across the majors, and ended the day little changed against the euro after the Swiss producer and import price index rose a slight 0.1 percent during the month of June, while the year-over-year rate plunged to a nearly 23-year low of -5.6 percent from -5.0 percent, adding to evidence that the Swiss economy faces severe deflation risks. Indeed, these downward price pressures are the reason why the Swiss National Bank has turned to physical intervention to try to prevent the Swiss franc from appreciating. All told, EUR/CHF remains within an intraday falling channel formation, with support now at 1.5087/90 and resistance at 1.5170. SNB directorate member Thomas Jordan said two weeks ago that they “continue to consider interventions to prevent an excessive rise in the Swiss franc,” and as a result, traders should beware that the further EUR/CHF falls, the greater the potential for intervention grows.

NEW YORK - Wall Street shares opened a new month and quarter on an upbeat note, as an encouraging report on the US manufacturing sector helped offset weak news on the labor market.
The market appeared to focus on a report showing signs of improvement in the US manufacturing sector in June even though it failed to grow for a 17th straight month.
That news helped to offset a survey from a payrolls firm showing the US private sector shed 473,000 jobs in June.
The Dow Jones Industrial Average gained 57.06 points, or 0.68 per cent, to settle at 8,504.06.
The Nasdaq climbed 10.68 points, or 0.58 per cent, to 1,845.72 and the Standard & Poor’s 500 broad-market index increased 4.01 points, or 0.44 per cent, to settle at 923.33.

LONDON - European stock exchanges surged ahead in line with a robust opening on Wall Street and in response to the positive US manufacturing data despite worse-than-expected unemployment figures.
The London FTSE 100 index added 91.5 points, or 2.15 per cent, to close at 4,340.71 points.

FRANKFURT - The Dax gained 96.8 points, or 2.01 per cent, to end the session at 4,905.44.

PARIS - The CAC 40 rose 76.56 points, or 2.44 per cent, to 3,217 points.

TOKYO - Japanese shares dropped despite the Bank of Japan’s quarterly Tankan survey showing that business confidence among major Japanese manufacturers had improved for the first time in two-and-a-half years.
Many investors were disappointed because they had hoped for a better reading, dealers said.
The benchmark Nikkei-225 index lost 18.51 points, or 0.19 per cent, at 9,939.93 points.

HONG KONG - Closed for a public holiday.

WELLINGTON - The New Zealand sharemarket closed lower, reflecting weakness in offshore markets.
The benchmark NZSX-50 ended down 15.737 points, or 0.563 per cent, at 2,780.369.

SYDNEY - The Australian sharemarket is expected to open higher after Wall Street rose on positive economic data and commodity prices strengthened.
At 0710 AEST on the Sydney Futures Exchange, the September share price index contract was 16 points higher at 3,877.
In economic news on Thursday, the Australian Bureau of Statistics releases international trade in goods and services data and manufacturing production data, both for May.
The Australian Office of Financial Management conducts a tender of $900 million in Treasury notes in two tranches maturing on October 23, 2009, and January 22, 2010.
In equities news, information technology firm ConnXion Ltd holds an extraordinary general meeting.
Tiger Airways Australia will launch its Sydney-Melbourne route.
On Wednesday, the Australian share market started the new financial year on a downbeat note, with major resources and financial stocks losing ground after profit-takers moved in.
The benchmark S&P/ASX200 index lost 80.9 points, or 2.05 per cent, to 3,874 points, while the broader All Ordinaries index fell 75.5 points, or 1.91 per cent, to 3,872.3 points.

NYMEX

Oil prices fell after bouncing above $US71 as markets reacted to a mixed report on US petroleum inventories.
The US Department of Energy said in its weekly report that American crude oil reserves tumbled 3.7 million barrels in the week ending June 26, the fourth weekly drop in a row.
The market had expected a lighter decline of 2.1 million barrels.
But the department also reported growing domestic inventories of key refined products gasoline and distillates.
New York’s main contract, light sweet crude for August delivery fell 58 cents from Tuesday’s closing price to $US69.31 a barrel.
Brent North Sea crude for August delivery lost 51 cents to $US68.79 per barrel.

COMEX

Prices for gold and other metals rebounded as the US dollar lost ground against other major currencies.
The US dollar declined as stocks moved higher after reports showing stabilisation in the manufacturing sector both in the US and abroad stoked some risk taking among investors.
Precious metals benefit from a weak dollar as investors often use gold as a hedge against inflation.
Metals reversed big losses from the day before that had been sparked by a weak report on consumer sentiment.
Gold for August delivery rose $US13.90 to settle at $US941.30 an ounce on the New York Mercantile Exchange.
July silver gained 16.6 cents to $US13.74 an ounce, while July copper was up 5.7 cents to $US2.315 a pound.

Trading a Short Kiwi

The Kiwi is back: after a terrible year 2008 where it lost 40% of its value against the US Dollar (between points A and B on the weekly chart), it has rebounded during the last 3 months to reach a recent high at 0.6595 in early June.

The huge decline of the New Zealand dollar started in March last year after it had posted a historical high against the Greenback at 0.8213. It was the time when the US Dollar was under pressure across the board.

Several indications argue now for a correction. The currency pair was quoting 0.4890 in early March rose by 35% in just 3 months, which is quite fast and sharp on the FX markets. As a result, the weekly indicators have reached high levels and suggest a technical correction. The Commodity Channel Index (CCI) has already started curving downward as the price action is losing its bullish momentum. The Relative Momentum Index (RMI) has entered its overbought area.

Most important, the price action has peaked on a significant resistance level. Indeed, it failed to break above the 50% Fibonacci retracement level of the decline occurred last year between points A and B.

On the daily chart, we also notice that the 50% retracement ratio also corresponds to a previous low posted in September 2008 (point D). In early June, the MACD has reached historical high value, therefore the upside was limited and the risk has mechanically shifted to the downside.

As the price action has been consolidating between 0.615 and 0.65 during the month of June, the MACD curved downward and crossed below its moving average: that’s bearish.

That’s why we expect a further correction, as both weekly and daily technical indicators go in the same way. Actually the currency pair already corrected to the 38.2% Fibonacci level where it found some intermediary support (point E). The next target could be then the level of 0.57, which corresponds to the first 23.6% ratio.

June FOMC Meeting Expectations

(June 23, 2009) The Fed is scheduled to release its press statement on Wednesday at 1415 ET/1815 GMT. That rates will remain unchanged at the 0.00% to 0.25% range is baked in the cake and thus all of the attention will once again be on the press statement. The economic outlook is likely to remain gloomy but the Fed will probably reiterate that “the pace of contraction appears to be somewhat slower”. Much has been made as to whether the Fed will announce how long they expect to leave rates on hold - much like the Bank of Canada announced that they are not moving until 2Q 2010 at the earliest. We think the likelihood of this is slim.

There would be little upside to this sort of move and if anything it would create credibility issues if the Fed were forced to move before their stated deadline. It is more likely that they will adopt a message similar to the prior statement when the group said that they expect “exceptionally low levels of the federal funds rate for an extended period”. They are also unlikely to expand the $300 billion program to buy Treasuries. This is because the Fed’s effort thus far has been futile. Indeed since the purchases started, interest rates have actually moved higher. In sum, barring any major surprise the meeting and accompanying communiqué will probably elicit little in the way of price action.

The biggest risks and the likely catalysts for some serious volatility would be an overall negative assessment on growth or that the committee will say outright how long rates are likely to remain on hold. With an equity market seemingly on knife-edge, any poor commentary with regards to the economic outlook could see risk assets retrench further - the market looks overly optimistic that the Fed will deliver a rosier outlook. If recent price action is prescient, we would expect the USD would be better bid under this scenario. Indeed the negative correlation between the buck and stocks has actually strengthened this month relative to last.

If the Fed announces that they are on hold until a specific deadline well into the future (call it mid-2010), the USD could suffer as US bond yields would likely plunge, sending the currently dollar-supportive interest rate differential lower. The US currently holds a 20 basis point advantage over the Eurozone 10-year yield equivalent. We think the probability of the former event happening (the Fed offering a somber economic assessment) is the more likely of the two and thus would anticipate an overall USD-positive reaction.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

However, we will state one thing. Based on the trade figures yesterday, it provides proof that artificial stimuli don’t benefit the economy at all.

In fact, it is more likely that if it wasn’t for the stimulus packages, the trade figures would have been even better, and Australia would not have been at risk of going into a recession at all…

More on that tomorrow.

Well, the US dollar is trading around the support level that Gabriel mentioned in yesterday’s Money Morning. That was based on the weighted US Dollar Index.

Against the Aussie dollar there doesn’t seem to be any support…

Click to enlarge

Or should that be resistance?

Anyway, we’ll leave the technical wizardry to our Swarm Trading technical analyst Gabriel Andre. But to us it just appears that the Aussie dollar is climbing its way back to where it was trading before the “flight to safety” happened towards the end of last year.

As the foreign exchange markets stand this morning, the Aussie is trading at USD$0.8200. Remember, it wasn’t so long ago that US dollar bulls were predicting the Aussie would fall to USD$0.50.

There was only one problem with the US dollar bull argument. It was all based on the assumption the global economy could not survive without the US consumer.

It was based on the assumption that China would not make anything if it could not sale things to the US consumer.

Gradually, that is being proved to be a complete fallacy.

And fortunately, Australia has the ‘get-out-of-jail-free’ card from the resources industry. The only threat to Australia’s advantageous position is if credit for the economic revival is claimed by the government and that encourages them to keep spending and keep on propping up chosen sectors of the economy.

However, that’s tomorrow’s subject so we won’t go any further on that score…

But although it is true the Aussie dollar is strengthening due to a new resources boom, it is equally true that the US dollar is being terminally weakened.

Reports late yesterday were that US treasury secretary Timothy Geithner was laughed at when he told students at Peking University that China’s US dollar investments were safe. Are the reports true? We don’t know. But, based on the fact that your editor laughed when watching this interview with CNBC suggests there could be something to the report.

The hilarity really starts with CNBC presenter Steve Liesman’s question at the 1 minute 2 second mark…

“I’m actually hearing quite a lot of confidence… in the basic policy framework we’ve undertaken” - Tim Geithner

We think he’s serious too. We think he really believes that handing hundreds of billions of dollars to AIG, Citi Group, Chrysler, General Motors and others is a positive step. And that ‘printing’ the money to do it is even better!

How much lower could the US dollar go? In one respect it’s already worthless. That’s if you compare it to the price of gold. Before the end of Breton Woods, the price of gold was less than USD$40 an ounce.

Today it is trading at USD$983 an ounce.

In other words, if you had USD$80 in 1970 and kept USD$40 in your wallet but bought one ounce of gold with the other $40, today you would have USD$1,023. Yet the cash component would have shrunk from being 50% of your wealth to only 3.9% of your wealth.

But what is the equivalent purchasing power today of your 1970 USD$40? Well, in order to get the same purchasing power, you would need USD$221 in today’s money. Simply put, the value of the US dollar has declined by over 80% in 39 years.

The value of gold on the other hand has increase nearly five-fold in terms of its purchasing power. That means, someone holding gold for the last 39 years could purchase nearly four times as many things today as he/she could have done back in 1970.

Have I made that more complicated for you? Hope not.

The US dollar has already been devalued to such an extent that it won’t take much more than a nudge to tip it into oblivion.

And if the US government believes China will never allow that due to the amount of US dollar investments (mainly treasuries) it holds, it better think again. Our guess is the Chinese have already crunched the numbers and written off the value of those investments anyway.

Sure, it will hurt them not to get their money back, but with the potential for massive growth in the domestic Chinese economy and a stronger recovery in other less indebted nations, the further collapse of the US dollar will soon seem fairly inconsequential to the rest of the world.

Other Stuff on the Markets

The S&P/ASX200 rose by 1.56% yesterday, while there was a relatively flat night on Wall Street with the Dow Jones Industrial Average adding 19 points. But in Europe the FTSE100 fell 0.65%.

The price of gold in Australian dollars is trading lower at $1,199.07 thanks to the stronger Aussie dollar, while in US Dollars it traded higher at $983.12.

The Aussie dollar continued to strengthen versus the US dollar and Japanese Yen, trading at USD$0.8200, and JPY78.40.

Crude oil held steady overnight, closing at USD$68.17.

Asian equity markets ended mixed Monday, with South Korean stocks shaking off initial concerns in the wake of a nuclear test by North Korea to end only slightly lower after a choppy session.

Tokyo stocks rebounded after dropping in the previous two sessions with steelmakers pacing gains, while Australian shares declined as authorities lifted a ban on short-selling.

Trading volumes were weak in several regional markets on caution before a holiday in the U.S. and the U.K.

In Seoul, the benchmark Kospi made a tentative start but sank as much as 6.3% by midmorning after North Korea conducted an underground nuclear test early Monday. But the market recovered sharply to end just 0.2% lower at 1400.90.

“Historically, we have experienced that the market volatility because of political issues is only short-term,” said Dongwook Han, strategist at Hyundai Securities.

Referring to the recent market gains, Han added that improving South Korean and global economic fundamentals and the likelihood that liquidity in markets around the world will be sustained in the second half of the year could push market further up in coming weeks. He expects the Kospi to hit 1700 points later this year.

A number of key stocks dropped sharply in Seoul during the session, but recovered the lost ground in afternoon trading. KB Financial Group ended 0.9% lower and Hyundai Motor gained 2.3%, while Hyundai Securities gave up 4.4%.

Japan’s Nikkei 225 Average ended up 1.3% at 9347 and Hong Kong’s Hang Seng Index closed up 0.4% at 17121.82.

Australia’s S&P/ASX 200 fell 0.6%, Taiwan’s Taiex ended little changed, China’s Shanghai Composite rose 0.5% and New Zealand’s NZX 50 dropped 0.7%. India’s Sensex ended 0.2% higher while Singapore’s Straits Times advanced 1%.

In Mumbai, the highlights of the session included a near 21% surge in the shares of Ranbaxy Laboratories following a management change over the weekend. Bharti Airtel dropped more than 5% on news it planned to buy a 49% stake in South Africa’s MTN Group.

The currency markets saw volatile trading in the wake of North Korea’s nuclear test, but also recovered. The U.S. dollar jumped as high as 1,269 won, but pared gains and was recently at 1,248 won, compared with 1,247.4 won Friday.

Referring to the won’s sharp movements, Standard Chartered strategist Thomas Harr said investors were used to the posturing of North Korea. “This may be an opportunity for offshore investors to sell the dollar/won later.

In other currency trading, the euro fell against the U.S. dollar as risk aversion picked up, at $1.3984 from $1.4015 in New York on Friday. Against the yen, the euro was buying 133.03 yen, after rising to 133.43 yen. The dollar was changing hands at 95.08 yen, from 94.85 yen on Friday.

Among financial stocks in Australia, Australia & New Zealand Banking Group dropped 1.4%, Commonwealth Bank fell 2% and Suncorp-Metway gave up 2.9%.

The Australian Securities and Investments Commission said it had lifted its ban on covered short-selling of financial stocks, though it added it could quickly re-impose the ban if needed. The ban was put in place on Sept. 21, 2008, in the wake of the collapse of U.S. investment bank Lehman Brothers.

“There has been some impact when you consider that the financial sector is the weakest across our market,” said Shaw Stockbroking’s head of trading Jamie Spiteri. “But] there wasn’t a huge increase in traded volume today. I think there has been some impact, but the decision to lift the ban isn’t surprising.”

Commodity plays gained in Japan and Australia on higher metals prices, with Nippon Steel up 2.7%, JFE Holdings rising 3.7% and BHP Billiton up 1.2%. Shionogi jumped 5.7% in Tokyo on news it would market a new influenza drug in Japan next year.

In Hong Kong, China Insurance International Holdings gained 8.5% on a plan to buy a 47.8% stake in Ming An Insurance.

Shanghai-listed shares were volatile amid concerns about a glut in share supply after Beijing indicated it would remove an unofficial eight-month ban on initial public offerings as early as next month.

“Worried investors think new share offerings will divert cash from the secondary market,” said Chen Jinren at Huatai Securities.

Singapore Petroleum surged 20.2% in afternoon trading on news of PetroChina’s offer to buy Keppel Corp.’s 45.5% stake in the company and make a general offer for the rest of the oil refiner, if Keppel’s stake sale proved successful. Keppel was up 6% on the prospect of a windfall from the sale of its stake, and PetroChina finished down 0.8% in Hong Kong and ended up 1.9% in Shanghai.

Spot gold was down $4.10 from New York Friday, at $952.40 a troy ounce. Front-month Nymex crude oil futures were 64 cents lower on Globex at $61.03 a barrel, after rising 8.2% last week, including a 1% gain on Friday.

“You’ve definitely got to be asking some questions about how much further prices can rise before we’re going to see some real evidence of demand recovery,” said Toby Hassall, a trader at Commodity Warrants Australia, who tipped crude in a $60 to $65 range for now.

First, the long-term bearish trend: it is solidly built by a succession of lower highs and
lower lows as shown on the weekly chart. The rebound started in March is well illustrated by
the indicators. They suggest a continuation of this rebound.

Both the MACD and the Momentum indicator are well oriented. The MACD is still at a low level
and moves above its moving average. The Momentum indicator has spiked during those past few
weeks and has just crossed the 100 line.

The Bollinger bands show that the recent bullish price action has made a pause, capped by
the moving average of the Bollinger bands. But two main characteristics here may argue for a
further bounce. Bottoms made outside the bands followed by bottoms made inside the bands
call for reversals in the trend: this is what happened on point A. Then, a move that
originates at one band tends to go all the way to the other band. This observation is useful
when projecting price targets.

That’s why a continuation of the rebound is possible. In this scenario a move towards
900 points would be the main objective: it corresponds to both the upper Bollinger band and
to the previous lower low (point B).

That’s a risky trade but the reward could be worth it: the potential upside is 33%.

The trade idea is therefore: BUY XPJ on the current levels, with a close stop-loss at 630
points (below the recent lows). Place your take-profit a bit below 900 points.

Time to Lock in a Rate on the JPY

This risk appetite index has been rising for more than 2 months. Typically, it’s good news for stock markets as the Yen trades (the mist famous carry trades) are strongly positively correlated with global equity indices. The Japanese Yen, which is backed by very low interest rates, is indeed a currency which is easy to borrow (therefore to short). Buying the AUD/JPY, at a constant change rate, gives you an interest rate differential.

March has been a bullish month for both the currency pair and the ASX 200 (see chart, ASX 200 in green). In our last update (MM of February 23), we were mentioning that the double bottom reversal pattern (built by points B and E) where a strong basis for a new rally. The price target indicated was 74, which is the 38.2% Fibonacci retracement level of the large decline occurred between July and October 2008.

Click to enlarge

We are nearly there. The currency pair is currently trading around 73.30, with a high posted today at 73.49. This rally, started at 55.50 on February 2, is therefore a 32% move up in 50 days. This is a huge gain on the FX market in such a little time.

This move is has been well illustrated by the Stochastic Momentum Index. It shows a clear bullish trend despite regular up and downs. It’s a short-term oscillator that crosses above and below a moving average line to generate short-term signals. A value posted above 70 is generally means that the underlying security is overbought. Here the index just triggered a positive signal by crossing above its moving average: a further move towards 74 or even higher is expected those next few days.

However it would drive the oscillator into overbought area. The 40-day technical momentum indicator also shows that extreme high values have been posted recently.

That’s a why a correction is expected soon, probably when the price action will have tested the 38.2% Fibonacci resistance level. In this scenario a pullback move towards 70 is probable.

Time to Lock in a Rate on the JPY
This risk appetite index has been rising for more than 2 months. Typically, it’s good news for stock markets as the Yen trades (the mist famous carry trades) are strongly positively correlated with global equity indices. The Japanese Yen, which is backed by very low interest rates, is indeed a currency which is easy to borrow (therefore to short). Buying the AUD/JPY, at a constant change rate, gives you an interest rate differential.

March has been a bullish month for both the currency pair and the ASX 200 (see chart, ASX 200 in green). In our last update (MM of February 23), we were mentioning that the double bottom reversal pattern (built by points B and E) where a strong basis for a new rally. The price target indicated was 74, which is the 38.2% Fibonacci retracement level of the large decline occurred between July and October 2008.

Click to enlarge

We are nearly there. The currency pair is currently trading around 73.30, with a high posted today at 73.49. This rally, started at 55.50 on February 2, is therefore a 32% move up in 50 days. This is a huge gain on the FX market in such a little time.

This move is has been well illustrated by the Stochastic Momentum Index. It shows a clear bullish trend despite regular up and downs. It’s a short-term oscillator that crosses above and below a moving average line to generate short-term signals. A value posted above 70 is generally means that the underlying security is overbought. Here the index just triggered a positive signal by crossing above its moving average: a further move towards 74 or even higher is expected those next few days.

However it would drive the oscillator into overbought area. The 40-day technical momentum indicator also shows that extreme high values have been posted recently.

That’s a why a correction is expected soon, probably when the price action will have tested the 38.2% Fibonacci resistance level. In this scenario a pullback move towards 70 is probable.

It’s a Bull Market (and that’s official)

A few years ago the media seemed to be particularly eager to announce the beginning of the bear market and as soon as we experienced a 20% fall in the major indices, all manner of pundits (without a cent actually in the market) crawled out of the woodwork. Although it is early days, according to the same metric we are now officially in a bull market – a 20% rise from the bottom. The question is: “will the next lot of experts come forward to let us know the good news?” For the trader and investor who is actually involved in profiting from market movements, rather than simply talking about them, we need to have the courage of our convictions, a sound trading or investing plan and a sound methodology in order to execute that plan. All of my recent articles have revolved around several macro economic and technical reasons why a bounce was to be expected. Although some of those arguments are relatively complicated, I was recently made aware of a more simple way that the recent low could have been calculated.

Below is a chart of the Dow Jones 30 Index (INDU) as it stood in mid November last year, taken from ProfitSource. Using the long Range Elliott Wave Forecast tool the TAPP (Time and Price Projection) is clearly visible and given by the broken line. In order to replicate chart, simply use the Walk Thru tool (which is circled below) and click on the 18th of November

click to enlarge

The Long Wave Elliott Wave Hi-Lite utilises the fractal nature of Elliott Wave theory to ignore the smaller iterations of waves. It is designed to focus on the longer term and more pervasive impulse wave directions in order to identify the predominant trend. The next chart shows how this played out over the following months.

click to enlarge

Although this was an extremely accurate forecast, it is not necessarily a confirmation to take a short trade using a Dow CFD or future contract. Those more familiar with EBOTs will see that there was a trading opportunity, although the stop strategy employed would have been the critical factor in remaining in this trade over such a long and volatile period.

Regardless, having a target price on a major index will certainly go some way to help all traders and investors position themselves more defensively or aggressively depending on their trading instruments. At the very least, those who had profited from the short side may have reduced position size into what is expected to be an area of potential support. One extra piece of interesting evidence over the first few months of 2009, has been the behaviour of the oscillator. The oscillator provides an additional confirmation to the Elliott Wave formation. Clearly, the power and length of the most recent Wave 5, is very much low in comparison to the Wave 3 (as illustrated below).

click to enlarge

All in all, this recent low was very nicely described in advance by the Elliott Wave rules contained in ProfitSource. It is my view that an integrated approach (such as combining the macro economic and fundamental evidence presented to us) can offer a tremendous and completely unassociated method of confirming good trades or, more importantly, dictating strategy.

The US Dollar Index (USDX) has been correcting since the beginning of March. The bullish trend started at mid-December failed to break above and even reach the previous high posted at 90.71 in November 2008 (point B on the chart).

There are currently several contrarian signals that are likely to drive the price action sideways and to increase the volatility.
The Momentum tools argue for a continuation of the current decline. This decline has started from the peak of March 4, at 90.24. A sharp reversal move has been driving back the Dollar Index to the current levels of 84.33, which is 6.5% lower. Both the MACD and the technical momentum indicator are bearish.

The points B and D also build a double top (highs at 90.71 and 90.24). It’s a technical pattern that generates pull back moves. However the recent plunge drove the Relative Strength Index (RSI) into oversold area. This oscillator just jumped back above the trigger line, which is a bullish signal on the short-term. Last time this pattern occurred, it was in last December (point C, first blue ellipse). At this time the Index was similarly oversold and strongly rebounded during the following weeks. Another indicator argues for a coming bounce: the Bollinger Bands. First, they have widened in March, which confirms that the volatility mentioned above has increased significantly. Second, one of the main interpretations of this indicator is when bottoms/tops made outside the bands are followed by bottoms/tops made inside the bands, then it’s a signal for reversals in the trend.

This is exactly what happened here. And a move that originates at one band tends to go all the way to the other band. The moving average in the middle often also acts as an intermediary support/resistance level. This observation is useful when projecting price targets.

That’s why a short-term rebound is expected now. Profit-taking from the Dollar sellers could drive the Index back towards 87. Then the bears are likely to generate a new downward wave. In this scenario the price action would probably test the low of December (point C) that also corresponds to the 61.8% Fibonacci retracement ratio of the bullish trend occurred between July and December 2008 (between points A and B).

The reasons were clear for FX traders and investors: the Greenback would be strongly hit by the financial turmoil the withdrawal of capital flows from the US. The global deleveraging has generated the liquidation of carry trades that were sellers of Japanese Yens for several years. As the risk aversion was soaring, the JPY has been massively bought back against all the other currencies.

Consequently the USDJPY fell from 110 to 87 in 4 months, from mid-August 2008 to mid-December (points A and B on the chart). It’s a decline of 21%. It’s nothing compared to losses occurred on commodities or stocks markets but on the FX market it’s a huge decline in such little time.

Click to enlarge

KS: The flows back to Yen from the ‘carry trade’ have surely dried up now, given the big rally in the USD since December?

GA: It also confirms the correlation between equity indices and Japanese Yen: when risk appetite rises, the JPY falls. Oppositely, when the risk aversion rises, the JPY rises too.

A pull back price action drove the currency pair down to 87 once again (point C) and immediately bounced back. It draws a classical trend reversal pattern, the double bottom (built by points B and C).

A new bullish momentum built up in late January/early February and gained some momentum when it broke above the resistance line (red line) that was made by higher lows posted between last August and last January.

KS: So, where will the Yen go from here?

GA: The momentum should be over now. The price action has been failing to break above the 50% Fibonacci retracement ratio (point D) of the bearish trend occurred between points A and C.

The MACD confirms that a correction on the downside is expected now. It peaked to extreme high levels, has just curved downward and crossed below its signal line. Same thing with the RSI that crossed below the overbought level two weeks ago.

Currently trading around 98, the USD/JPY is likely therefore to correct towards 95 in a first time (previous high that would become a new low), then to 92.50.

CAPITAMALL TRUST, uob maintain SELL with target price $1.19($1.52)

DBS, macq maintain OUTPERFORM with target price $10.74($12.56)

EPURE, ssb maintain BUY with target price $0.3($0.24)

MANDARIN ORIENTAL, nom maintain REDUCE with target price US$0.62(US$0.93)

MOBILE ONE, db downgrade to HOLD with target price $1.60

NOBLE, cl maintain SELL with target price $0.7
NOBLE, nom maintain BUY with target price $1.31($1.40)

OCBC, mac maintain OUTPERFORM with target price $5.66

SINGTEL, dbs maintain FULLY VALUED with target price $2.25($2.52)
SINGTEL, ssb maintain HOLD with target price $2.70

SPC, dmg initial coverage BUY with target price $2.95

STARHUB, db maintain BUY with target price $2.49
STARHUB, gs maintain BUY with target price $2.51($2.45)

SUNTEC REIT, ocbc maintain BUY with target price $0.8($0.9)

UOB, mac maintain OUTPERFORM with target price $11.92

VENTURE, dbs maintain BUY with target price $6

WILMAR, nom maintain BUY with target price $3.30