While sorting through the longer-term charts for the major pairs and reflecting on the 10-14 September FX trading week, the euro's five-day rise of 2.5 percent against the US dollar -- its largest weekly advance against the greenback in 33 weeks -- certainly caught my attention. As I scanned the daily charts for the yen crosses, it quickly became apparent to me that the eye-popping move of the week was the Japanese currency's two percent drop against Europe's single currency on Friday 14 September.
US stocks reacted positively to the US Federal Reserve's launch of an open-ended third round of quantitative easing -- dubbed by many as QE3 -- on 13 September. The S&P 500 index, the broadest measure of US stocks, reached its highest level since late 2007 before Thursday's close, raising the prospect of a broad "risk-on" mood in global equity markets the following day. (I discussed previously in this post the Japanese yen’s general tendency to move in relation to global risk appetite.) Although the correlation between the yen and equities has been weaker of late, the odds of weakness in Japan's currency usually rise when stocks rally sharply.
The US central bank's latest policy move also put further pressure on the recently beleaguered US dollar. The American currency established a new seven-month low against the yen just above ¥77.10 before the 13 September close.
More than thirteen months ago, the USD/JPY pair was parked near that same 77.10 level when the Bank of Japan (BOJ) intervened to weaken the yen.
The yen's post-FOMC advance against the dollar did not go unnoticed in Japan. By 8:00 a.m. Tokyo time on Friday, reports were surfacing that the BOJ had conducted a rate check -- often a precursor to intervention -- following Thursday's QE3 announcement.
According to the CFTC, as of 28 August speculative yen long positions outnumbered short positions in the futures market by a 5 to 3 ratio. As Friday's Asian trading session got underway, yen longs faced two major concerns:
(1) the threat of BOJ intervention; and (2) the possibility of rising risk appetite in the wake of the Fed move.
The euro's initial post-QE3 announcement rally against the yen topped out at the ¥100.75 level, which had defined a major bottom established by the EUR/JPY pair in 2011.
It was not unreasonable to expect that the same 100.75 level which provided a sort of temporary ceiling for the euro against the yen during the prior New York afternoon session, could serve as a floor for the EUR/JPY during the early part of Friday's Asian session. The trade: Buy EUR/JPY near the 100.75 level.
Traders who sought to close the long position before the weekend had reason to exit below 103 after the pair failed to break above the psychological level during the final two hours of the European trading week.
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