It is no secret that US dollar has been in a slump lately, something I commented on yesterday. What isn’t widely publicized is that some big time players are buying it now. This includes the biggest one of them - central banks. It appears that Brazil’s central bank is eager to buy U.S. dollars on the spot foreign market, and has been doing so since May. By latest account, they accumulated about $7 Billion USD and are ready to buy more. Central banks are notoriously secretive about their actions and just as illusive when reporting their intentions, but two reasons for the latest activity has been cited.  BCB claims the need to diversify its foreign holding and the wish to weaken local currency, Real. If that’s the case, we have one more central bank unhappy with strength of its own money. More might follow.

While amount on money spent to date, the $7 B, is a relatively modest sum, as far as Forex goes, one has to put into perspective. First, if BCB indeed wants to diversify its holdings, they are likely to keep it on books for some time. It could be months or even years, which makes these funds unavailable for farther speculation. This is important. While everybody understands the buying power that central banks posses, most traders overlook the staying power of major players. With the inherent insight they have into inner workings of this market, it is always interesting to know what they are up to.

Should more central banks decide to buy additional few billion of US Dollars, pretty soon we are talking serious money. From the published data BCB is not alone. Reserve Bank of Australia also sold several billion of AUD over last few months for USD. RBA says that the bank has a policy to buy the green back, mostly from its US trading desk in New York, when trading in the currency becomes volatile. Some accused RBA of acting more as a trader, because of profits made on those transaction, selling at annual high levels. I don’t think there is anything sinister about any central banks taking profits on some of its activities. This offsets risks, and losses, they are subject to in their capacity of ultimate market maker. Also, AUD moved even higher last few days, in spite of RBA selling it, so I think we can put thoughts of nefarious intentions to the rest.

AUD-USD in not the only currency pair making new yearly highs. Of particular interest to me is the fact that virtually all of Yen crosses are near or at highs for 2009. Charts look remarkably similar and they universally indicate very important point in time. Today and tomorrow may very well decide direction of JPY pairs for next few weeks. Here are some charts.

CAD-JPY daily chart seems to be making a top, preparing for a reversal. Candle for today, as of right now, is a variation of a “hanging man” at a right place and correct time for a reversal. However, the period (day) is not over yet, so this candle may easily change shape, and total picture, depending on what happens over next several hours. Right now I think that a pullback of few hundred pips is more likely than immediate breakout.

The beast looks almost identical to the previous chart. Here also today’s candle could easily close as “hanging man” or a “doji”. If this happens, chances for a top, even if temporary, are enhanced. I must stress that appearance of strong reversal pattern does not guarantee such outcome, only increases probabilities of success. It is important to wait and see what happens, before committing to trades. That said, if current candle closes at about the same shape it is now, one could place a straddle trade, with a buy order above today’s high and sell order under today’s low. Tomorrow I’ll take GBP-JPY under a magnifying glass, try to sketch out couple of possible outcomes here, as well as cover trades mentioned over last few days. They are both under way.

Mike K.