Monday, May 19, 2014

Price action indicator works its magic on USDJPY | A “Perfect Storm” for the Aussie?

In yesterday’s commentary we highlighted the possibility that the Dollar Yen pair (USDJPY) was poised to make a move to the downside through a significant level of support. A sustained break here could have been enough to change what had been the dominant trend in this pair, which was upward.

In the event it moved through the support alright but, crucially, it failed to stay there. The resulting price action formation is now indicative of resumption to the upside.

Pin Bar

In classical Price Action technical analysis, a pin bar is a chart candlestick price bar that contains a very small body (difference between opening and closing price) relative to the height of the bar itself (difference between the high and low of the bar), which is offset markedly to either the top or the bottom of the bar. The predictive power lies in the idea that price should move in the direction indicated by which end of the bar the small body appears after the closure of the bar.

The chart above shows examples of pin bars (arrowed) on the USDJPY daily chart, going back over the last couple of months. In all of the cases indicated the prediction for price movement has been correct.

Yesterday’s pin bar is a classic of its kind. Will the prediction inherent in it be fulfilled on this occasion? Perhaps the pronouncements of the Bank of Japan (BoJ) early tomorrow morning (GMT) will have something to do with that.

A “Perfect Storm” for the Aussie?

The Iron Ore price, which is of considerable importance to the strength or otherwise of the Australian dollar due to the amount of this hard commodity that is exported to China, has fallen below $100 per metric tonne. This was not unexpected and the price has been in decline for some time, but due to the psychological importance the market always gives to round numbers, it is now being widely reported.

Also in Australia, an austere budget has been passed by the Conservative government, characterised by spending cuts and tax rises. The Labor opposition has threatened to block the passage of this budget in the Senate. So enter Standard and Poors, to announce that any inability by the government to achieve a budget surplus within a short period of years would force the ratings agency to reconsider the AAA rating it has given to Australian government debt.

Such a development would be a really big deal for the international currency markets, and for the Aussie dollar in particular. Even talk of such a thing is a considerable negative for the currency.

A Perfect Storm comes about when just about every factor for the development of a severe event occurs at the same time. One would be forgiven for thinking that all the Australian dollar needs now is a destabilising geopolitical event on its doorstep. Could tensions in the South China Sea between China and Vietnam over the positioning, by China, of an oil rig in disputed waters fit the bill here?

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