USD / JPY FORECAST - Rated "BUY"

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USD / JPY has been in a downtrend since July of 2008 when it was trading at about 110YEN to the Dollar JPY. Today (after an impressive 2 - 3 day rally from 90.00), it trades at around 92.65. The Japanese Yen has a fairly high correlation to risk and the Japanese Yen (Not the US dollar) appreciates the most in times of risk aversion (Note that yen appreciation means lower USD / JPY since JPY is the non-base pair).

Perceived resolution to the Greek problem, continued US and worldwide equity strength, and a spike in yields helped USD JPY break the downward trend line that had contained gains for a several months (See graph below). The break in the said trend line was further confirmed by the daily close and a full day candle above the dominant downward trend line. In our view, this signals a shift in trend and we believe the trend in this pair has turned up.

From a fundamental perspective, it makes sense to expect the Japanese Yen to weaken against the US dollar (higher USD / JPY) for the following reasons

• Interest rate expectations for the US dollar compared to the Yen have turned up. In other words, rate and speed of monetary tightening in the US is greater than that of the Japanese. The Japanese are still battling deflationary pressures and tightening for Japan in further down the road (and probably a lot slower) compared to the US. The deflationary battle Japan faces is evidenced by the 1.2% drop in consumer prices yesterday (ref Bloomberg article @ http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a.UD0fLMEhJk). Furthermore, as the Yen weakens, the Japanese (export modeled economy) can sustain its recovery.

• Also, we’ve said that the USD / JPY has a high correlation to risk and if you think global recovery is underway, then it is reasonable to expect USD JPY to rise . We think a rise to the 100 mark in the coming months is not out of the question.



From a technical stand point, the daily chart (1 year) clearly shows the break out that occurred earlier this week. The expectation is for USD JPY to retrace down and possibly touch (and bounce off) the broken resistance line before continuing the move upward. Right now, a retest of the old resistance should result in a pull back to the 91.25 area (the longer it takes USD JPY to retrace, the steeper the retracement since we are dealing with a downward sloping line).





Trade Plan:

Buy 3 Standard Lots of USD JPY following the price points below

Buy 2 lots of USD JPY @ 91.40

BUY 1 lot of USD JPY @ 91.00 (if it falls that far).

1 standard lot, 1 pip = $10.08

Using “last in, last out” technique.



Sell 2 lots @ 97.00 (560 pip potential)



Sell Final lot @ 99.00 (800 pip potential)



Risk Control:

Stops for the 1st 2 units should be placed at 89.90 (- 150 pip potential).

Stops of the last units should be placed at 89.00 (- 200 pip potential).