Yen Struggles to Find Direction
Fundamentals
Yen futures have mounted a comeback the past few sessions, as traders cover Euro/Yen carry trades due to the financial turmoil in the Eurozone. The Japanese currency could very well have plummeted if the crisis in Greece had not happened. The Yen could benefit from the much softer rhetoric from Fed Chairman Ben Bernanke during his Congressional testimony. The central bank head stated that the US economy is in a "nascent" recovery, which may require low interest rates for an extended period of time. The Yen became the focus of traders looking to put on carry trades, as many had expected the Fed to have a more hawkish tone with regard to interest rates, or possibly to raise the Fed Funds rate. The central bank raised its overnight discount rates last week, which was an unexpected move that market observers believed may have hinted toward a rise in the Fed Funds rate. Mr. Bernanke dashed these hopes, which were a bit overblown, and this could put the greenback under pressure against major currencies. Traders executing carry trades may switch from Yen to Dollars in order to balance out positions.
Trading Ideas
The fundamental and technical outlooks appear to give conflicting views of the Yen. The fundamentals seem to indicate that the Japanese currency could move higher, yet the technical outlook appears to hint that the Yen could move lower over the near-term, and trade sideways over the intermediate-term. This suggests that some traders may wish to consider taking advantage of the possible lack of direction by trading the range and shorting the March contract when prices approach 1.1200, and reversing if and when the currency falls back into the low 1.0900's. Some traders may possibly wish to abandon the strategy on a significant close above 1.1250 or below 1.0750.
Technicals
Turning to the chart, the March Yen continues to trade sideways, unable to break resistance in the 1.1250 area. Yesterday's doji pattern hints at a possible near-term reversal. The fact that the March contract was unable to close above the 20 and 50-day moving averages could also be seen as a technical setback for the currency. Momentum has also been lagging behind both price and RSI, as well as hinting at technical weakness.
Rob Kurzatkowski, Senior Commodity Analyst
