US Dollar, Japanese Yen Diverge in Choppy Trade, Though This May Not Last

The US dollar and Japanese yen were mixed on Wednesday, with the greenback falling against most of the majors and the yen holding on to most of its gains.

In reality, the moves marked more of a consolidation than anything else as no major support/resistance levels were broken. Looking to the DXY index, though we did see a bit of a trendline break, a range formation offers additional support for the US dollar. Meanwhile, the JPY crosses remained below key supporting trendlines, which now offer resistance, while bearish formations in pairs like GBPJPY and NZDJPY suggest further declines are in store.

Now, this is a repeat from yesterday, but there is evidence that risky assets could take a heavy hit in the near-term. DailyFX Technical Strategist Jamie Saettele noted on the DailyFX Forex Stream on Tuesday that trading volume in stocks this week has been at its lowest since the last three major holidays: ahead of the US Independence Day holiday, the days before and after Christmas, and the day after the US Thanksgiving Day holiday, suggesting the increase will not last. Indeed, meaningful rallies typically occur only with higher trading volumes. Second, investor optimism may have hit an extreme, as evidenced by the trumpeting of a headline like Why the ‘Carry Trade’ is Back in a major media publication (the Wall Street Journal). We also need to cite the August 2009 issue of Futures Magazine, which shows a bull in the mist. Third, on Monday the Federal Reserve’s Senior Loan Officer Survey showed that banks tightened lending in Q2 due to a “more uncertain economic outlook,” suggesting that credit conditions are nowhere near normal and adding to evidence that the financial sector could continue to lead the US stock market on a gradual decline. Given all of these signs of an important turn lower in equities and FX carry trades, there looks to be great upside potential for safe haven currencies like the US dollar and Japanese yen in coming weeks.

Event risk should be fairly low on Thursday, with only the Conference Board’s US leading economic index and the Philadelphia Fed’s manufacturing index. The leading index is forecasted to rise by 0.6 percent for the month of July, which will likely be due primarily to the rally in equities during that period. Meanwhile, the Philadelphia Fed’s index is projected to edge up to -2 for the month of August from -7.5, but based on Monday’s surprisingly strong Empire manufacturing index, the results could beat expectations.

[B]Check out the Daily Fundamentals in its entirety for a look at what happened across the majors.

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