Currency Corner
It is said, in market circles, that aside from shorting Japanese Government Bonds over the last 10 years, that the other so called “widow maker” has been trying to call the turn in the yen. No amount of intervention by the Japanese Central Bank has been able to put a concrete floor under the currency, with every bout of intervention by the BOJ to drive the currency lower being met with renewed strength only weeks (in some instances just days) later. Do I wish to make the missus a “widow” in calling for the turn in the yen?! No, but I think that the confluence of factors that have now aligned on the Japanese currency point to a potential major reversal which is now in the process of being born. The all time low on the dollar yen pair (which in terms of daily volume traded in the currency markets is second only to the Euro dollar) was in March of 2011 when it hit 76.54 during a late evening dip in New York in thin markets. This pushed the pair decisively through the previous all-time low of 79.75, a level that had held since 1995, some 16 years earlier. I personally traded the dip lower last year from the bull side, reasoning that the sharp move lower would trigger a lot of serious stops and that, as is frequently the case when they are hit, there would be a potential sharp reversal. Within days of the all time low, the Japanese Central Bank was galvanised into action in attempting to stop Japanese exports disappearing down the plug hole and they sold massive amounts of yen. But, as the chart below shows, even this display of strength did not cause the yen bulls to falter and the currency was soon back below the key 80 level.
The chart to the right actually has a multitude of bullish clues within it. I have used the weekly chart in order to give a more medium-term view of the pair. The suggestion of a long position in this piece is not from a short-term trading perspective, but from a medium-term position trading basis. With the interest rate differentials between the dollar and yen effectively non-existent at present, there is also next to no cost in carrying this position over the medium-term — something that is a problem when shorting higher interest currencies against a lower interest rate one, and that can catch the unwary spread bettor out. In the first instance, we can see clearly that the pair has broken to the upside through the downtrend that had been in place since late March of this year. There is an argument that the pair has in fact been trapped in a “wedge” formation (the 2 red lines) and so the first target is 84 (the height of the wedge) in coming weeks. Adding fuel to the bull fire is the positive MACD cross over and the rising RSI that has cut up through the key 50 level. Finally, it is not too clear on the chart but, two moving averages I personally find useful — the 19 & 37 week exponentials, look to imminently cross through each other — with the pair trading above these, if this holds then this is a very positive additional sign. Also from a technical perspective, the current intermediate downtrend has been in place since late 2007 and so just over 5 years — generally about the exhaustion point of a currency trend. Turning to the fundamental backdrop, it seems that the US economy, even in ‘real’ terms (i.e. adjusting for Japanese deflation) is now pulling away from the Japanese economy — the differential between US Treasuries and JGB’s is now at its highest for some months and this has historically been a good lead indicator for the pair.
78 | www.financial-spread-betting.com | November 2012