Thursday, March 11, 2010

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.


Anonymous said...

We find it is correlated to the S&P recently.

sean said...

For one that doesn't trade forex, what would be the next best way to trade this?

Sion said...

I've been watching this cross for months. Came close to getting a decent long entry a couple of times but really this instrument is not trending well at the moment. A good one to keep watching.

Anonymous said...

Agree ,2010 could go by before we get a trending move

Guy M. Lerner said...

As stated in the article, I believe the set up is there

Proshares: YCS

This is an ultra short which has me a bit cautious not on the trade but the vehicle as I don't like them