Tag Archives: Yen

Alex Kazmarck of Trade Leader SpotEuro presents analysis of the JPY.

Fundamental:

Bank of Japan announced last week that it will continue to keep its benchmark interest rate steady at 0.10% and made no change to its monthly purchases of nearly 6 trillion yen. The USD/JPY weakened on the news as the BOJ continued to reiterate that it will continue to expand its monetary base until its inflation target of 2% is reached and stabilizes. Expectations that Japan will have a difficult time reaching its goal as early as 2015 is leading many to think that the yearly amount of 70 trillion yen will most likely be increased in 2014, especially if inflationary data continues to underperform. This week’s CPI and other key data from Japan will be very important in order for the yen to keep its downward momentum. Of course, expectations that the FOMC will begin tapering the QE policy are also aiding the dollar. Some anticipate the first announcement to come as early as December, but most anticipate a January meeting to lead to the first cut so that more economic data could be evaluated, especially on the employment front. These are key factors that will be moving this currency pair in the coming months.

I think it will be much more important to monitor the fundamentals than technicals as there remain risks in both Japan, US, and EU markets and any major disruption could cause the yen to act as a safe haven and lead to a reversal in favor of the yen.

Technical:

On November 8th, the USD/JPY saw a breakout of the wedge pattern that has been consolidating during the summer months. The combination of this technical breakout along with the aforementioned key fundamental factors has led to the perfect storm in JPY weakness. The key levels to watch if the pair continues to increase are the highs set over the past 7 months, with the 103.70 the key level before we can confirm the trend. Some other key levels to be aware of are 105.50, which is the 61.8% fib level from the 124 highs in 2007 to the lows of 75 in 2011. During that time, the yen strengthened due to the unwinding of the carry trade as global economies weakened and yield was more difficult to find given the risk involved. Above 105.50, traders should look to the 110 level before further consolidation occurs.

To the downside, which we only anticipate if equity markets begin to breakdown, a break below the supporting wedge trend line could lead to mid-80s in the cross.

Outlook:

While the current strength of the USD/JPY cannot be ignored, I’ll be looking for this week’s Japanese economic data to confirm the bullish potential. A break above 103.70 and 105.50 will act as key technical resistance levels and if this trend continues, a target of 110 could be insight during the first half of 2014.

As mentioned earlier, there remain risks that must be monitored. These risks are hidden in the low bond yields that are manipulated by central banks in order to push investments into riskier assets. While this could continue indefinitely, these types of actions have the potential to form bubbles. Market participants are aware that if the QE policies were not present, yields for risk free assets such as government bonds would be much higher, a key measure of market risk.  I think it’s prudent to put the latest breakout out of the wedge into context and be aware of these risks as volatility could increase very quickly and price action could return to what we saw in 2008.

Last week I took at a look at the current state of the euro. This week I think I’ll have a look at the yen and see how things are shaping up with that currency.

If we start with a look at USD/JPY we can see a market in the process of consolidating the powerful rally which dominated the first part of this year. Notice the falling Bollinger Band width indication in the bottom sub-chart.

Likewise, we see a similar sort of thing going on in EUR/JPY. Here, though, we can observe that the consolidation has progressed further. This is indicated by the Band width being much closer to the lows of the last several years.

More consolidation can be seen in GBP/JPY. In this case the indication is more akin to what we see in USD/JPY in that the Bands have been narrowing, but remain well above their most narrow.

Things are a bit different with AUD/JPY. Thanks to the weakening of the Aussie through the middle part of the year there was a turn back up in the Band width, indicative of a rise in volatility rather than the decline seen in the other pairs.

What I think is significant with AUD/JPY is the way the cross has developed support near the highs of the 2010-2012 range area. This is a place we’d expect support to form after the range break, and if it holds there’s every chance the market will turn back up. If that happens, though, the Bands will start narrowing once more.

I mention this because it ties in with what I’m thinking is likely to happen with the yen over the next few weeks or months. EUR/JPY looks like it wants to break out of its consolidation, which fits in with my expectation that the euro is getting ready to move. GBP/JPY and USD/JPY, however, still look consolidative to me. It may be a bit longer before those two pairs are ready to move again (though GBP/JPY is a bit closer). As a result, I expect the yen pairs to mainly continue to work through consolidation for a little while yet, but with a bias toward JPY weakening.

The yen is an enigma to many forex market participants. It doesn’t trade like the European currencies, nor does it move like the commodity currencies. Oftentimes, it trades against the dollar the opposite way we would expect given the broader market actions.

There are a lot of things that go into yen trading, like the fiscal year-end in March, that make it unique. That has been furthered along in recent times by the aftereffects of the earthquake. This is all within the broader context of an economy that has struggled to do anything for many years now, with little prospect of reversing that any time soon. The low Japanese interest rates as a result have kept the yen at or near the top of the list of favorite currencies to borrow for carry trade purposes.

We saw a lot of the Japanese bugaboos hit the yen hard during the February/March period when USD/JPY rallied from testing 76 to the downside to probing 84 on the upside. That came after many months of the market going sideways at a time when the markets were looking at the US economy improving, which was supporting the dollar.

As you can see from the chart below, the weekly Bollinger Bands got VERY narrow as a result of the long consolidation. The rally since the range break has taken the Band width in the opposite direction, getting it to near its highest level in the last couple years.

USDJPY Chart

The market has obviously since retraced some of the rapid rally, thanks in part to weaker US economic data starting to get traders thinking the Fed may decide it needs to act to further loosen monetary policy. We’ll find out this week just how far down the path that thought really has gone. In the mean time, we have an interesting technical picture.

I’ve added two lines to the weekly chart which represent important levels for the market from here. The upper one is the high from April of 2011 above 85. The lower line is the high from late October and early November that should now be support. Those create a very good set of bounds between which the market can consolidate while the Bollinger Bands work back toward at least a more normal width.

Drilling down a bit, it is worth looking at the price distribution charts to fine tune the analysis. The chart below features monthly distributions (based on daily moves). Where they are thick, the market has spent the most time. Call these attraction zones. Where they are thin, the market hasn’t spent much time there at all. Call these rejection areas.

USD/JPY Chart

This month USD/JPY moved down to test the price level from February where the market spent the most time (though granted, not very much because of that month’s trending action). The market has bounced from there, essentially rejecting what should have been a good attraction area. As this was also above the peak from Q3 last year, it can be considered an indication of strength. As a result, I like the prospects for the market to work back up toward recent highs. That is perfectly reasonable, even within an overall consolidation.

So what’s the implication of this?

Well, if the market just shifts into consolidation for a while then I think it probably just indicates a market that overreacted to the recent softer US data (especially the jobs report). If USD/JPY eventually extends the rally from 76 to break the April 2011, it will probably do so on the basis of a combination of the concerns about US growth abating but the same not being the case for Japan. The limiting factor, though, is the trade imbalance. If the US economy strengthens sufficiently to increase import demand, that will eventually flow through to benefit the yen.

 

We're coming into a kind of silly season for the financial markets. The period around year-end and the start of the new year is one of strong seasonal patterns. We've heard about the Santa Claus rally, and no doubt stock market commentators will be bringing that up quite a bit in the weeks ahead. They may also talk about tax-loss selling, especially given the type of year we've had in the stock market. And of course December sees volumes tend to decline as the big institutions wind down their activity into year-end and folks focus more on gift shopping and holiday parties.

It must be noted, though, that some of the strongest seasonal patterns in the market this time of year are those in the forex market. That's what I want to talk about in this article. As much as I could outline a whole array of year-end patterns among the major pairs, I'm going to focus here on just the yen.

Why the yen?

Well, it's been a pretty tough year where seasonal patterns are concerned. The developments in the Euro Zone in particular have overridden the sorts of trading we otherwise would have expected to see in the euro. The yen has held much more close to form, aside from the Japanese intervention that is.

So what do we expect from the JPY in December? Here's what Opportunities in Forex Calendar Trading Patterns has to say on the subject

First of all, December is a net negative month for the yen overall, though not hugely so. What's interesting, however, is that Fridays in the final month of the year have shown a pretty clear selling pattern. By that I mean about 60% of the time the yen ends the day lower, averaging a loss of about 0.20% against the other major currencies. This may not seem like much, but it does stand out in the statistics as an outlier.

The losses for the JPY tend to be front-loaded toward positions entered early in the month, however. The pattern starts to shift in the latter part of December toward one that is more yen-positive.

Normally, it would be worth looking at EUR/JPY or CHF/JPY as a good play against the yen (and in favor of other patterns) this time of year. With the on-going EZ issues, however, and the defined linkage between the EUR and CHF by the Swiss National Bank, it might be a good idea to avoid those pairs. A good alternative would be AUD/JPY. Long positions in that pair have their strongest positive 1-month hold returns of the year for trades entered in December.

For investors, the AUD/JPY pattern for December is a good set up for carry trade strategies. The cross is one of the strongest among the majors in terms of interest rate differential and the upside bias in the exchange rate has the potential for a nice added kicker to total returns. Just be aware that there could still be considerable volatility in the rate.

For those more trading oriented, a better approach is probably to use the seasonal patterns to bias or shade your positions. For example, you could perhaps take a little more risk when trading with the seasonals and less when trading against them. In other words, integrate seasonals into your existing strategy. Do not just make them a strategy unto themselves. By doing so you could improve your risk-adjusted returns.

 

Investors who obeyed the old stock market maxim, “Sell in May and go away,” have side-stepped the vicious downturn in equity prices through the summer and early-autumn.  Indeed, global stock market indices peaked on the first trading day of May and subsequently dropped by almost 20 per cent, as a sharp slowdown in economic activity across the developed world, alongside the never-ending euro-zone sovereign debt crisis, shook investors’ bullishness.

The major market indices have already endured a near bear market decline, as a seemingly relentless stream of disappointing news has been digested, so it is reasonable to ask whether it is safe to reverse course and establish long positions.  Indeed, the trusted market adage advises investors to throw caution to the wind and, “come back on St. Leger day,” the date of the world’s oldest classic horse race.  The St. Leger Stakes was run at Doncaster last Saturday but, the historical evidence – coupled with reliable leading indicators – suggests that investors may well be better-served to remain on the sidelines for now.

The month of September has typically proved difficult for investors and, it is the only month to have generated a negative mean return through time.  The mean return has been minus 0.25 per cent since 1802, and the seasonal effect has shown little sign of becoming less pronounced in the recent past.  Indeed, one dollar invested in the stock market only in the month of September since 1971, would be worth less than 70 cents today or just 12 cents in real terms.

The historical record demonstrates that the economy and financial markets have been particularly crisis-prone this time of year, such that cash has typically generated higher returns than the stock market across the months of September and October.

Historical crises that struck this time of year include the Panic of 1819, the first major financial crisis in the United States, the Panic of 1857, which was triggered by the failure of the Ohio Life Insurance and Trust Company, the Panic of 1873 that followed the collapse of Jay Cooke Company, the run on the Knickerbocker Trust and the subsequent Panic of 1907, not to mention the Great Crash of 1929.

More recent episodes include Black Monday in 1987, the United Airlines mini-crash of 1989, the 1997 attack on the Hong Kong dollar, the terrorist strikes on the World Trade Centre and the Pentagon in 2001, and of course, the Lehman Bros bankruptcy in 2008.

Those of a bullish persuasion will undoubtedly argue that the historical record is purely coincidence and thus, of little value to tactical decision-making.  That may well be true but, it is important to stress that recent market action has been accompanied by a whole host of indicators that give pause for thought.

First, both 10-year Treasuries and German bunds are trading at record-low yields below two per cent, which is simply not consistent with continued growth in the developed world.  The respective yield curves may well have a positive slope but, is important to recognise that the spread between short-term and long-term interest rates loses its usefulness as a leading economic indicator when short-term rates are close to the zero-bound.  The actual level of yields, at a five- to ten-year horizon, suggests that a recession in the euro-zone and the U.S. is imminent.

Second, the cost of corporate credit is rising and the recent widening of high-yield bond spreads from an average of 440 basis points in April to more than 730 basis points in recent weeks, warns of an impending downturn.  Indeed, a recession typically follows whenever the spread is sustained above 700 basis points.  This indicator did send a false signal in the latter of half of 2002 as an economic downturn did not subsequently materialise.  However, this did not protect equity investors who endured a devastating decline in stock prices.

Third, leading economic indicators such as copper prices are in the process of breaking down, while the demand for safe haven assets such as gold, the Japanese Yen, the Swiss franc, and even the U.S. dollar, is strong.  Furthermore, bank share prices are crumbling across the globe and funding costs are under pressure.  It is clear that stress is building throughout the financial markets and tail-risk is rising.

Mark Twain, the celebrated American author, quipped in his 1894 novel, Pudd’nhead Wilson that “October…is one of the peculiarly dangerous months to speculate in stocks.”  The truth of the matter is that both September and October have proved to be notoriously tricky for equity investors and, early indications are that the seasonal pattern looks set to be no different this year.  Tail-risk is rising as economic growth falters and the euro-zone sovereign debt crisis moves closer to the end-game.  Caution is warranted for now.

Originally posted on www.charliefell.com

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

The yen has been doing pretty well over the last few months, much to the chagrin of the Bank of Japan and the Ministry of Finance. The Japanese have been pretty vocal about not liking the direction of their currency, but they haven't yet taken any big steps the way the Swiss have done in putting a floor under EUR/CHF. The gains in the JPY can be seen quite dramatically in EUR/JPY, but the story isn't all that different for USD/JPY.

Here's the rub, though. We're in a period in the calendar where the yen tends to be strong. In fact, this week specifically is the point of year from which USD/JPY tends to have its worst 1-month performance as the chart below shows (courtesy Opportunities in Forex Calendar Trading Patterns). There are an awful lot of bars pointing down on the histogram from here to year-end, so it's not like things get much better after this week either.

Here's the question to ponder. Presuming the Japanese authorities are aware of the seasonal strength in the yen this time of year, does that inspire them to work to prevent it? Meaning will there be verbal and/or market intervention to at least blunt any JPY gains in the weeks ahead? Or, will they not want to fight the pattern and take a hands-off approach with the idea that their efforts would produce better results more toward the end of the year?

Of course this may end up being one of those years where the second half (despite the way it's gone so far) doesn't end up being overly strong for the yen. Seasonal patterns are only tendencies, after all. In that case, intervention won't be required (though it could be used to accelerate JPY weakness). If the yen keeps going as it has done the last few months, though, it's going to make for an interesting decision for the BoJ, etc.

By the way, the CHF has been in a strong seasonal pattern up to now. The Swiss National Bank clearly decided to go against that.

From the aftermath of the debt ceiling crisis and the S&P downgrade to the release of the latest unemployment numbers, we’ve been busy counting the latest stories in the world currency markets. Check out our top picks of the week:

News on the S&P downgrade made headlines and many wonder what’s next for the U.S. economy. After a tumultuous week in the stock market, the CBOE Market Volatility Index rose 26 percent, marking a 29-month high. Some investors are stressing a need for new currencies and stock exchanges either in the form of a world economic system managed by the International Monetary Fund or cyber currencies. Meanwhile, gold futures soared due to the rating cut, reaching a record $1,697.70 an ounce. The U.S. Securities and Exchange Commission launched an investigation last week, asking Standard & Poor’s to provide information on employees who were informed of the downgrade decision before it was announced. Concern has once again risen for the European economic crisis as falling shares in French banks prompted finance and budget officials to search for new ways to trim public deficit. Employment numbers released last week show that U.S. unemployment benefits have dropped to a four-month low. These statistics have already impacted the currency markets; both the USD/JPY and USD/CHF have increased, which “releases the hot air” out of the franc and the yen. Japan continues to face problems with the rising yen, as the currency’s increase against the U.S. dollar leads to a cut in Japan’s export sales.

 

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Up late working on some cool stuff you'll see soon at Currensee, I happened to check in on the Asian session.  We checked up on the Aussie Dollar last week and this time I bounced off a post by our buddy Casey on the EUR/JPY.  Given all the chatter about the weak USD, it's nice to look at a pair that doesn't include the greenback.

Casey notes that the EUR/JPY is "testing a downward trendwall on the 4hr chart and that could be significant change in trend" and posits a resistance point at 133.77 after which he says, "we could see a reversal of the current down trend and that could bring new highs."

EURJPY support and reistance via Currensee Community Volatility widget

Over at the Currensee dashboard, we can see that the community predicts similar Resistance points, but most of the Currensee traders have so far guessed wrong on this pair.

EURJPY on the Currensee market watch widget

As the sun rises on the US trading day, we'll see what develops.  I hope you'll join the discussion on Currensee.

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Be sure to read the full risk disclosure before trading Forex.  Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.