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The Yen is winning

16 January 2009

The Technical Trader’s view:

The Dollar Yen is a long-familiar picture:

WEEKLY CHART The Yen is certainly been strengthening for a while – the breakdown through the Lows at 101.30-70 created massive resistance which helped drive the market lower. But unless you are already Long of Yen this looks rather mature and extended.

But if traders look elsewhere there are interesting situations developing against the Euro and Sterling which may offer better risk reward trading opportunities.

The Euro is an especially interesting sell against the Yen:

WEEKLY CHART The Yen trying to break down through the 120.05 Fibonacci support. And a small continuation Triangle has completed. If the breakout is confirmed then the support from the Fibonacci retracement would have collapsed. The Yen would surely speedily strengthen against the Euro

WEEKLY EURO YEN CHART The drama of this short-term chart is unmistakable. Certainly the triangle has completed, but the potential Double Top is rather more impressive still. That needs a break down through 115.91 suggesting a move to 104 or so. Watch and wait

MONTHLY STERLING YEN CHART This big picture is fascinating: the market, driven by the Bear Rising Wedge has reached a vital juncture. A break of the long run Pivotal low at 129.15 (established in 1995) would herald fresh Sterling selling. Now look at the detail.

DAILY STERLING YEN CHART The market has already touched the long term Pivot once and bounced. But note well that it was only allowed to bounce up as far as the resistance from the low at 139.11. In all, it has actually failed there multiple times. Hence the pull-back to the 129.15 Pivot. And this is a vital test.

The Macro Trader’s view:

Much attention has been paid to the Pound recently as it almost collapsed in the run up to Christmas, especially against the Euro, almost reaching parity. The Dollar too has come in for much attention as the US currency experienced an unexpected period of weakness going into mid December, before starting a recovery which now looks like an extension of the Bull move which began in July 08.

Then there is the Euro. Initially it was supported as an alternative to the Dollar, but now it is increasingly tarnished by an economy that is weakening rapidly because of concerns over the sustainability of the fiscal position of several peripheral Euro zone members.

But these are not the only players. The Yen has been in a Bull trend against the Dollar since June 07, albeit with several corrections. Against the Euro, the Yen bottomed in July 08 and against Sterling the Yen has been in a strong Bull market since July 07.

Yet despite the strong Yen performance, the Japanese economy has experienced its own difficulties, and is now in recession with deflation once more a serious threat, with the Bank of Japan recently easing monetary policy back to almost zero.

The Japanese trade account has suffered too, with exports recently dropping by 27%, so why is the Yen so strong against the other majors? Certainly, Interest rate differentials aren’t supporting it and Japan’s stock market remains weak.

Since currency trading is about relative strengths, involving selling one currency against another, traders react to the latest piece of news. Once a dominant newsflow develops, either negative or positive news dominating, the “passive” currency will either suffer or gain from the resultant market trend that develops.

Currently the market is focused on the negative news flows coming from the US, UK and Euro zone and the Yen is benefitting as the passive currency. The market knows the situation in Japan is poor, but sentiment is such that that story seems only more of the same, nothing new has happened.

The other leading economies have turned relatively quickly from a prolonged period of strength with strong upward inflationary pressure, to suffering one of the worst downturns in living memory requiring Central Banks to slash interest rates and raise the possibility of quantum easing, a tool previously used in Japan.

So is the Yen strong? Yes but only because the news coming from the other major economies is so poor, and until that position changes the Yen looks set to strengthen further.

Mark Sturdy,
John Lewis

Seven Days Ahead

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