USD/JPY Forecast May 2, 2012, Technical Analysis

The USD/JPY pair had a volatile day on Tuesday as the 80 level continues to be a magnet for action. The level is a massively supportive area, as it was the scene of a massive breakout back in February. The pair has been falling since the middle of March though, and as a result we have been hearing a lot of mixed calls in the marketplace.

The Bank of Japan has embarked on massive easing in the form of Japanese Government Bond purchases. The additional ten trillion Yen announced last week actually did very little to stem the rise of the Yen, as the market is still contemplating what the words of the Federal Reserve Chairman mean. During the news conference on Wednesday, Mr. Bernanke suggested that if needed, the Federal Reserve could ease further if the economy demanded it.

In this scenario, we have a race to the bottom. It comes down to who can destroy the value of their currency quickest, and this chart is a perfect representation of that. However, Mr. Bernanke didn’t exactly suggest a set of parameters that would warrant further easing, so there is a real possibility that the market may be disappointed. Also, it should be noted that the economic numbers out of America are much stronger than Japan at the moment, so the effects of a strong Yen are starting to show up in Tokyo.

The pair has several different things going on at once when it comes to the charts now. The 200 day exponential moving average is just below the current price, and this will certainly have the trend traders looking at this pair in a bullish light. (The 200 day EMA is one of the most commonly used indicators by longer-term traders.) The pair sees this appear just at the 80 level, which of course was the site of resistance previously. This should become support if the breakout was real, but in reality it is very difficult to think it wasn’t – it was simply far too strong to be otherwise in our opinion. (We do however reserve the right to be proven wrong in the end!)

The 80 level also see the introduction of the 50% Fibonacci retracement level from the bottom of the market back in late January. The 50% is also one of the most commonly used indicators by longer-term trend traders, and as a result this will bring in the Fibonacci traders as well.

When so many different things line up at the same time, the risk to reward ratio suddenly looks a lot different than the typical trade. It is because of this that we are willing to buy on a break of the high on Monday as it would show a nice bounce in this market. The Non-Farm Payroll number on Friday could be seen as an indicator on whether the Federal Reserve is near easing, and a good number then will more than likely send this pair straight up.

USD/JPY Forecast May 2, 2012, Technical Analysis

Written by FX Empire