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December 16th, 2012 at 9:00 am

Japanese Election in Focus.

In the past few weeks, the Japanese Yen has experienced considerable weakness. Some believe the main trend has finally reversed and the JPY will keep falling for years to come. Clearly, it is way too early to estimate accuracy of such calls, but they will be put to a test this week. These claims are based largely on results of Japanese election, which is taking place today. In general terms, market participants think that opposition win will be negative for the JPY.

Latest polls show the Liberal Democratic Party should win the election, which should make its leader Shinzo Abe the new prime minister. He has been campaigning on strong growth agenda, including a new aggressive stimulus package targeting infrastructure spending. The new government, if elected, is also expected to put increased pressure on the Bank of Japan, calling for more monetary easing. As a reminder, the BoJ has its regularly scheduled policy meeting later in the week and markets are already pricing in more action, before it even happened.

As of this writing, the LDP appears to have secured a simple majority in the lower house of parliament, although it could achieve a super majority in allience with another party. Another thing to remember is that the FED is also in the middle of aggressive easing. Since the general benchmark for the Japanese Yen strength/weakness is its exchange rate with the US Dollar, the BoJ will have to try to match what the FED is doing. Otherwise, the JPY might not weaken as much as many currently predict. These coming few days should shed some light on the issue, starting later today.

It will be interesting to see how the Yen reacts at the open and gaps are very possible. They would provide early trading opportunity. I will not however take a directional view before the opening. First few hours should clear some uncertainty and perhaps offer additional clues for coming days. Trading could be easier in other currencies.

Most of the USD pairs had strong moves on Friday. More importantly, they also closed near daily extremes. This present a strong possibility of a short-term reversal in these pairs. In case of the EUR-USD, I will look for a bearish reversal candlestick pattern on the hourly chart, which would mark the entry. In the perfect world, the price should make a new high for the move. Once that happens, the correction is likely to be in the range of 30-50 pips, something to be worked out once the set up emerges.

Few days ago, I discussed the overextended (in my opinion) uptrend in the NZD-USD. It has continued since, but the price behavior became choppy. This suits my purposes, as now I have a short entry point at 0.8394. If the price makes a new high, this entry will be moved to just under the most recent minor low. In addition, a new high (if present) will make the Kiwi subject to the same trade as described above for the EUR-USD. Altogether, this chart could bring 1-3 trades in quick succession, all on the sell side. Have a great trading week!

Mike K.

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