USDJPY: It Isn't Correlated

While the excitement of the media has been focused on equities, other corners of the markets go unnoticed. One such asset is the USDJPY cross rate. From my perspective, the USDJPY is on the cusp of a secular trend change.

I previously reviewed the technical and fundamental picture for the USDJPY. Fundamentally, the Yen should be vulnerable as chronic deficit spending and changing demographics of its population should result in higher interest rates and/or a weaker Yen. These dynamics are best explained by Kyle Bass of Hayman Partners, LP in this quarterly letter to his investors. See page 15 for his analysis of the secular dynamics afflicting Japan.

Technical considerations are as follows. Figure 1 is a weekly chart of the USDJPY cross. Key pivot points are the black and purple dots. In general (not always), a weekly close over 3 key pivot points is a reliable sign of a secular trend change. In fact, back in the first half of 2009, this pattern failed. USDJPY is already trading above 3 key pivot points, but it remains below a trend line drawn from the June, 2007 highs. A weekly close below support at 88.092 would be reason enough to exit the position. The first level of resistance is at 95.875.

Figure 1 USD/JPY/ weekly

I like USDJPY for several reasons: 1) the asset is well below its highs - think mean reversion and below value; 2) it is not on anybody's radar; 3) the underlying fundamentals make sense; 4) there is well defined risk; 5) the asset is not correlated to equities.