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There will be retail yen selling interest while Japanese institutions are likely to increase US dollar buying below the 118.0 level. A fragile short-term dollar recovery is likely before the US currency hits renewed selling pressure.

Overall levels of risk aversion spiked higher on Friday with a fresh cutting of carry trades as investors looking to reduce risk ahead of the weekend. The move into the yen was compounded by weak US data, a sharp drop on Wall Street and increased global credit stresses with the yen breaking through the 118.0 technical barrier against the dollar.

This trend accelerated in early Asian trading on Monday due to fears of a rout in global equities. The yen strengthened to a high of 117.20 against the dollar before edging back to 117.50 in a fragile correction as the worst fears over global stock markets were not realised.

There will still be the threat of position capitulation due to margin calls and markets will remain more cautious over carry trades. Volatility levels will remain higher in the short term and Japanese finance officials will be looking to stabilise market conditions. There is also likely to be further retail selling interest which will curb near-term yen support.

Source: Investica

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