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June 26, 2015

Land of the Rising Yen?

Perhaps no currency has exemplified this era of global, orchestrated currency devaluation better than the Japanese Yen. The commitment of the Bank Of Japan as well as the persistence of investors to maintain the so-called carry trade has made the Yen devaluation ride a standard-bearer for Keynesians. After all, the Yen dropped from about 75 versus the U.S. Dollar in 2011 to 125 this month. Even so, it has really only retraced its 2007-2011 gains. So from a longer-term perspective, it is possible that this Yen decline still has a lot further to go. Furthermore, moves of this momentum and magnitude do not typically turn around on a dime.

That said, on a short to intermediate-term time frame, the currency is going to run into the occasional snags. So it is, in our view, at present levels with a handful of major resistance levels on the USD/JPY coming into play.

As the USD/JPY chart shows, there are several lines of potential significance nearby that could at least slow the Yen’s decline. These include:

  • 23.6% Fibonacci Retracement of 1982-2011 move ~ 124.00 
  • 61.8% Fibonacci Retracement of 1990-2011 move ~ 128.50 
  • 61.8% Fibonacci Retracement of 1998-2011 move ~ 120.50  
  • Down Trendline connecting the key 1990 and 1998 tops.

Again, we aren’t forecasting the end of the Yen’s devaluation. We are merely pointing out the presence of key chart points that could support a counter-trend rise in the Yen over the intermediate-term. Should that transpire, it could produce a profound reaction on the part of “carry traders”.

It could also throw a wrench into the rally in Japanese equities. While we are loathe to assign reasons for moves in financial markets, it is no secret that the weakness in the Yen has contributed mightily to the rally in Japanese stocks. And though we see a little more possible upside in the near-term in the Nikkei 225, it too is getting close to some levels that may give the rally pause.

Based on the key levels of USD/JPY resistance identified above, the Yen may find some forces of support in the near to intermediate-term. We would give the USD/JPY some slack on the upside to the upper-120′s. A sustained advance above that level could eventually open up the 150 level for assault. If the USD/Yen fails here, the first level of consequence below may be back down in the mid-100′s.

Courtesy Dana Lyons' Tumblr (Article Archive Here)

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