Kris Sayce (KS): Hey Gabriel, I think it’s time for a quick chat on the Japanese Yen. What have you got for the readers?
Gabriel Andre (GA): I’ll tell you – Currency traders: it’s time for you to buy back the Japanese Yen against the US Dollar!!
KS: I’m pleased to hear that, because you know – and Australian Small Cap Investigator readers know as well – that I’ve been bullish on the Yen since the market reached a low last November. Of course I was too early (or just wrong, depending how you look at it!), but it’s had good momentum recently.
GA: Yes, the USD/JPY has probably ended its rebound short/medium-term bounce back. Remember, the USD/JPY plunged deep as the financial crisis was expanding in the second half of 2008.
KS: Why was that?
GA: The reasons were clear for FX traders and investors: the Greenback would be strongly hit by the financial turmoil the withdrawal of capital flows from the US. The global deleveraging has generated the liquidation of carry trades that were sellers of Japanese Yens for several years. As the risk aversion was soaring, the JPY has been massively bought back against all the other currencies.
Consequently the USD/JPY fell from 110 to 87 in 4 months, from mid-August 2008 to mid-December (points A and B on the chart). It’s a decline of 21%. It’s nothing compared to losses occurred on commodities or stocks markets but on the FX market it’s a huge decline in such little time.
Click to enlarge
KS: The flows back to Yen from the ‘carry trade’ have surely dried up now, given the big rally in the USD since December?
GA: It also confirms the correlation between equity indices and Japanese Yen: when risk appetite rises, the JPY falls. Oppositely, when the risk aversion rises, the JPY rises too.
A pull back price action drove the currency pair down to 87 once again (point C) and immediately bounced back. It draws a classical trend reversal pattern, the double bottom (built by points B and C).
A new bullish momentum built up in late January/early February and gained some momentum when it broke above the resistance line (red line) that was made by higher lows posted between last August and last January.
KS: So, where will the Yen go from here?
GA: The momentum should be over now. The price action has been failing to break above the 50% Fibonacci retracement ratio (point D) of the bearish trend occurred between points A and C.
The MACD confirms that a correction on the downside is expected now. It peaked to extreme high levels, has just curved downward and crossed below its signal line. Same thing with the RSI that crossed below the overbought level two weeks ago.
Currently trading around 98, the USD/JPY is likely therefore to correct towards 95 in a first time (previous high that would become a new low), then to 92.50.
Comments on this entry are closed.