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The U.S. dollar may be rebounding this morning but I think the gains will be short-lived. August is a terrible month for USD/JPY – the currency pair has fallen TEN out of the last TWELVE Augusts. Although seasonality does not equal a certainty of USD/JPY weakness, it is worth noting that 83 percent of time, USD/JPY has ended the month lower by an average of 2 percent. Considering that USD/JPY started the month at 86.46, a 2 percent move would put it below its November low of 84.83.
The reason why there is strong seasonality in favor of USD/JPY weakness this month is because of the reinvestment of bonus payments received on Toshin investments in July and the repatriation of Treasury coupon payments in mid August. Also, there tends to be more hedging by exporters ahead of Obon week, which is one of the most important holiday seasons in Japan.
Also on a technical basis, the Dollar Index has broken below the 200-day Moving Average. The following chart shows how a break of the MA has represented a major shift in trend. For example, even though the dollar index had been falling between 2008 and the first half of 2009, the break below the MA triggered another 10 percent sell-off in the U.S. dollar.