USD/JPY seems inevitable, but could take longer than some

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The JPY remains the focus in foreign exchange markets as the USD/JPY continues to move closer to the 100.00 level. After moving to an overnight high of 99.68, some profit taking saw the USD/JPY test support at 98.70 before moving back above the 99.00 level in early European trading.

Technically speaking, the support at 98.70 is backed up by support at 98.40 and 98.10. Resistance appears at 99.50, followed by 99.85, ahead of the 100.00 level. The currency pair is highly overbought on an RSI basis, so some pullback is expected.

The Bank of Japan’s new aggressive monetary easing plan seems to have encouraged traders looking for risk, as global investors feel the influx of liquidity in Japan will have Japanese investors looking for riskier assets to invest in, and some of the higher risk currencies are strengthening such as the South African Rand and the Mexican Peso. These currencies, according to analysts, have been among the top performers since the BOJ policy meeting on April 4.

In other currency action, the EUR has remained comfortably above the 1.3000 level, currently trading around the 1.3030 area, the middle of the overnight range. Concerns regarding the Portuguese bailout do not seem to be affecting the EUR. Portuguese Finance Minister Gaspar mentioned that the “Troika” will be coming to Portugal for another visit after the Portuguese constitutional court rejected a number of austerity measures lsat week. EUR support is at the 1.3000 level, while resistance appears at 1.3060 and 1.3080. There were some comments from Spanish PM Rajoy regarding the ECB. He suggested that the ECB become more like the FED and BOE, central banks that can “print” money through quantitative easing, as well as the BOJ who are able to implement huge stimulus packages. THe ECB, before instituting any policy measures must make sure they are in alignment with the ECB’s mandate of price stability. These comments have not gotten “ a lot” of press at the moment, but could gain some traction later in the week.

FED chairman Bernanke spoke yesterday and stated that the “US economy is significantly stronger than it was four years ago”. He also added that it is “still far from where all want it to be”. He also spoke about how, due to more effective stress testing, the US banking system has “greatly improved”.

Most of the attention today should remain on USD/JPY as traders position themselves for the move higher. The markets seem to believe this move is inevitable, but it is taking a little longer than some thought.

Further reading: Weakness in the Euro-Zone

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Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.

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