Recently media has been very focused on the US Dollar. Remarks about its behavior are becoming ubiquitous if predictable. Same for the Japanese Yen, which also earned a title of being a “safe haven”. This pushed the commodity currencies into a background. They have been the attention magnets for better part of the year. As we know the commodity currencies belong to countries which export huge amounts of raw materials. Their economies largely depend on prices on physical commodities and general economic health of global economy. These are Australia, New Zealand and Canada. Some would add South Africa, Russia and , to a smaller degree, Brazil, into this camp. One could say that very simple, yet accurate, barometer of world economic climate is Australian Dollar-Japanese Yen cross. If this pair is moving up things are good or on the rebound, while falling AUD-JPY indicates either existing or coming problems.

This pair, and all others in this camp, like NZD-JPY, CAD-JPY as well as their crosses with USD, CHF and so on, have been rising most of this year. Recently these strong moves have been developing signs of resistance and maybe even possible reversal. Here is a weekly chart of NZD-JPY, very representative of how most of how most of crosses look like right now. Price advanced from a low of about 44 early in a year to above 69 recently. This is a huge move, which only looks small on this chart because of severity and historic nature of preceding drop. If FIB retracement tool is overlaid on this graph, we can see that the price is between 38 and 62 levels, an area where reversals are very common.

This general zone is also resistance level, at around 68, which used to be strong support couple of years ago. Change of polarity effect. Also, 100SMA, which I use as dynamic trend line, provided resistance recently. Last week’s candlestick formed a large bearish engulfing line pattern, considered by me a strong formation. None of these alone would be worrisome, but coming together in confluence point towards very possible market reversal. Daily chart is becoming negative as well.

Last few days have been very volatile, not only for NZD-JPY but for all crosses of commodity currencies. Daily trading ranges simply exploded to levels not seen in a year. For example, 4 day ATR has the highest reading since November 2008, towards the end of that panic.  This itself could indicate possible start of a correction. For now daily chart offers a strong support at 63 level, which was tested last night. Should price break under that line, chances are good for move to 57.50 or so. I will be watching this level closely.

On the surface, sell off in this crosses doesn’t make any sense . With recovery seemingly under way, Yen should be getting weaker and the commodity currencies should be roaring. I for one have hard time looking for sell set ups in the Yen crosses. It goes against my long term views. But charts don’t lie- they can be misread but if price is painting bearish picture, I must at least acknowledge it. For any larger fall in these pairs we would need a catalyst and I don’t know what that could be, we will find out after the fact. One possibility is announcement from a central bank. For example Reserve Bank of Australia has another policy meeting later on this week, with strong expectations for additional rate hike. Lack of action there could initiate a sell off. This is pure speculation, but it should illustrate how a sell off might come about.

I am not planning large scale selling campaign just yet, just watching markets and outlining some possibilities. This line of thought will be continued if needed, using NZD-JPY as a proxy for all crosses of interest, since it would appear to be most vulnerable. For now focus is on shorter time frames, more typical for me, hourly and 4H charts. Like the Sunday evening set up, which was present last night.

Virtually all Yen pairs had extended moves from Friday. Once the large hammers formed on hourly charts, it was time to act. As always, the target was opening level, which in case of GBP-JPY happened to be bring 116 pips. While it could have been done on all of JPY crosses, in most cases risk was a little too big in relation to possible rewards. Length of the wick, or shadow, of the hammer exceeded objective. That’s why only this one trade, rather than going “all in” across the spectrum.

I also closed my AUD-CHF trade for a small gain. Action in this pair looks like mood swings of a severely disturbed mental patient, so I canned it. Don’t want to become one myself. Mental patient, that is. Chart will be posted tomorrow, together with any possible updates on commodity currencies sell off.

Mike K.