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James Hyerczyk
Japanese Yen
Japanese Yen

The Dollar/Yen is posting a slight recovery early Wednesday, following a combined steep sell-off the first two sessions of the week. The price action indicates a slight divergence from the major U.S. stock indexes, which could be a sign of a possible short-term bottom. Nonetheless, the overall driving force in the market will be risk aversion.

At 0812 GMT, the USD/JPY is trading 110.412, up 0.180 or +0.16%.

The eight consecutive session decline in the Dollar/Yen has been driven by several factors including speculation over the outlook for future rate hikes by the U.S. Federal Reserve in 2019, falling Treasury yields and safe-haven buying into the Japanese Yen due to plummeting U.S. equity markets.

Adding to investor worries is the partial shutdown of the U.S. government, President Trump’s constant blasting of the U.S. Federal Reserve and worries over a potential liquidity crisis due to a phone call form Treasury Secretary Mnuchin to several major U.S. banks.


Today’s divergence from the stock market may be an early sign that concerns over a stock market crash may be softening. If this is the case then look for the USD/JPY to continue to strengthen as short-sellers begin to pare positions in preparation for a possible reversal to the upside in U.S. stock indexes. While this chart pattern will not necessarily indicate a change in trend is taking place, a sudden shift in momentum to the upside by the equity markets could trigger a strong short-covering rally in the Forex pair.

Look for the Dollar/Yen to continue to lose ground if another rapid swing to the downside by the U.S. stock market leads to another plunge in U.S. Treasury yields.

Fundamentally, Trump is likely to continue to blast the Fed and its Chairman Jerome Powell, but keep in mind that he cannot fire the Fed chief. I don’t know why this has become an issue as of late because Powell is essentially untouchable.

Mnuchin’s call to the major banks should be a concern because it brings back memories of the credit and liquidity crunches from 2008-2009. Wall Street wants to know why the call was made in the first place. Some bears thing it was a preemptive move to make sure banks have enough cash available in case of a stock market meltdown.

As far as the partial government shutdown is concerned, The U.S. Senate and the President could be expected to be deadlocked until January 3 when Congress reconvenes.

On the economic news front, the Bank of Japan’s Core CPI on an annual basis came in at 0.5%, down from 0.6%. The figures also missed the estimate.

In the U.S. on Wednesday, traders will get a chance to react to the latest report on housing from the S&P/CS Composite-20 HPI. It is expected to have risen to 4.8%, down from 5.1%. The Richmond Manufacturing Index is estimated to have risen to 16, up from 14.

Overall, keep an eye on investor appetite for risk and don’t be surprised by a stock market reversal.

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