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Ichimoku Cloud Signals Weaker Yen, RBC Says: Technical Analysis

The yen may weaken to levels against the dollar last seen during Bank of Japan intervention, according to a Royal Bank of Canada, citing technical analysis.

The break above 76.90 yen per dollar, the top of so-called cloud of the ichimoku chart, means the chances the Japanese currency will weaken against the greenback have increased, said George Davis, chief technical analyst for fixed income and currency strategy in Toronto at RBC. The yen tumbled to 79.53 as the central bank sold the currency Oct. 31 and has failed to retrace its losses, signaling a deviation from previous interventions, he said.

A close above 78.30, a level last reached three days after the October sale, would underpin recent dollar strength against the Japanese currency, Davis said. A close below 77.24 would shift the upward momentum of the pair to neutral and an ending below 76.72, the bottom of the ichimoku cloud, would signal downside risks outweigh topside risks.

“The market isn’t as eager to push dollar-yen down to the lows we were trading at in late October and challenge the BOJ,” Davis said in a telephone interview. “It does look like, technically, based on that breakout last month, that there are top-side risks that we can’t ignore in dollar-yen.”

The previous time the Bank of Japan intervened, on Aug. 4, it sold a record 4.51 trillion yen ($60 billion). The currency retraced all of its losses in four trading sessions.

The dollar gained 1.1 percent last week to 77.73 yen. It traded 0.3 percent stronger today at 77.95.

Ichimoku charts are used to predict a currency’s direction by analyzing the midpoints of historical highs and lows. The baseline plots the sum of the highest high and lowest low in the preceding 26 trading days. The cloud refers to the area between the first and second leading-span lines on the chart and is used to show an area where buy orders may be clustered.

In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index.

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