The yen showed some unexpected strength on Monday, but the revival of Japan’s currency was short-lived when all of the majors, including the yen, weakened again early on Tuesday. Although this initial strength seemed like a positive move for the yen, traders should act with caution in response to any signs of strength because the Japanese economy is not yet improving to a substantial extent.
Bank of Japan Governor Kuroda is in a difficult position because he must now achieve the tricky task of keeping the currency rate and the interest rate for bonds balanced. A big difference between these rates, as was reported this week, is indicative of the economy faring badly. The Japanese currency is likely to be heavily influenced in the short term by news from the US and China and volatility is expected to continue. Such volatility in the market opens a window of opportunity for traders who are advised to watch the economic calendar closely and plan their trades accordingly.
The US dollar strengthened slightly on Tuesday following the release of positive data on customer confidence, but employment data due on Thursday may weigh on the currency. If the data is more positive, this will be taken as a sign that the US economy is slowly recovering; US Federal Reserve President Bernanke however is unlikely to reduce the stimulus until more solid evidence of a recovery is available.
If he cuts the stimulus too early in the recovery it will likely reverse the fortunes and thrust the US economy backwards. Whenever the stimulus is completely removed, the US dollar is expected to weaken in the short term, which is why it is crucial that the economy is in a robust position before the monetary stimulus is removed or reduced.
The indications of a US recovery and disappointing news from China have weighed heavily on the Australian dollar recently. The previously booming Australian economy has started to show weakness, and coupled with this double-sided attack from the US and China, the AUD is showing a longer term downtrend.
There is light at the end of the tunnel for AUD traders however and towards the end of the week, traders should reassess their trades and look to buy the Aussie dollar once again.
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