Last week in Forex trading ended with corrections to prevailing trends. High flying currencies, namely the Japanese Yen and the Swiss Franc, weakened considerably during last hours of trading. That was in response to the speech by Bernanke during the FED annual symposium in Jackson Hole, Wyoming. He outlined likely additional steps to be taken by the central bank in order to spur the economic recovery in the USA, watered down new quantitative easing.

Now it is time for the Bank of Japan. The BoJ is expected to hold an emergency meeting on Monday to ease monetary policy to counter the Yen’s strength. This anticipation was heightened by  Governor Masaaki Shirakawa’s return to Tokyo from a trip to the United States earlier than projected. Speculations abound on what new steps might be taken, but most likely outcome is to expand a program for short term, low interest loans, even though such scheme is already in place and, so far, failed to produce desired results. Another option is to step up purchases of government bonds. And, of course, everybody is looking for signs of intervention, which, frankly,  is not very likely to happen.

Whatever they do, or do not, currencies should be responsive to any news from Japan. If the meeting is held, as speculated, than the exact steps taken by policy makers will be scrutinized and assessed, followed by criticism of actions being to strong or enough. That will be reflected in Yen and its crosses, but predicting how the JPY will respond to an event which might or might not happen is, at best, too complicated to be seriously entertained. Even the Friday closing indicates uncertainty in markets.

The intermediate chart of USD-JPY shows a nice uptrend for most of Friday, followed by additional push after the Jackson Hole event. Normally, this would indicate a follow up after the weekend. However, the closing action puts that in question. We can see a shooting star forming right at 62% Fib retracement level of the last price swing, as well as 100 SMA, suggesting that the price has run into a strong technical resistance. This indicate that chances are high for the correction to have run its course and the USD-JPY ready to resume downtrend. All Yen crosses look virtually identical on this time frame. Whatever the outcome of the BoJ meeting, if it happens, it will have help market “decide” what it wants to do here. As far as immediate trading goes, it is probably wait and see, or exploit gaps. In the environment of heightened volatility, they have good chance to form, hopefully providing short term trading opportunities, lasting few hours.

And what about the Most watched Forex chart? The weekly graph of the USD-JPY looks very interesting. Very strong downtrend is unbroken, the slope is still steep, but… What happened on Friday gave the last weekly candle shape of a hammer, a strong reversal pattern. It was formed at new low, is very distinctive and is in conjunction with MACD divergence. Put together, technicals indicate a correction within the prevailing downtrend. How big? Probably to reach one of the retracement levels. Could be a good buying opportunity (longer term) for those who think that BoJ will intervene, or who are bullish for any other reason. However, one should expect a rough ride, even if the correction does happen.

The Canadian Dollar closed very strongly on Friday. The USD-CAD ended the week on a low of a day, hence making it a candidate for a trend exhaustion play. If the downtrend continues after opening, then a reversal pattern few hours into the day will likely be a buy signal. Details will have to be worked out once things start moving. There should be a lot of action this week, with many other crosses showing interesting price behavior and volatility increasing everywhere. More in next update.

Mike K.