Thursday, May 20, 2010

The Japanese Yen

Several weeks ago reader Fu Manchu politely suggested that "he just didn't see it" with regards to my short Yen position. Several months back, it was looking that I was correct in my "call" that the Yen was going lower, but here we are with risk rising and investors avoiding risk, and well the Yen is rising as it appears the carry trade that funded the risk taking is coming off. Anyway, back to Fu and his suggestion of "Guy, take another look". I have, so thank you for the suggestion, and it just might be time to pull the plug on this trade. Here are my technical thoughts.

Before looking at several charts, let me state what I have stated all along: the Yen has the technical characteristics of an asset poised to undergo a secular change of trend from up to down. This fact alone keeps the Yen on my radar screen even though this trade - not the best choice of words for an investment with a secular time frame - is not working out.

Figure 1 is a weekly chart of the USDJPY cross rate, and key pivot points are identified with the black dots. Key pivot points are those areas, where buying (support) and selling (resistance) are likely to occur. Several months ago, the weekly close over the 3 key pivot points was reason enough to expect a secular change in trend. While price has yet to close below the most recent key pivot point at 88.092, it is trading out of the rising up channel and it seems likely that it will test this key pivot in the future. A weekly close below this key pivot point is bearish for the USDYEN -i.e., higher Yen relative to the Dollar.

Figure 1. USDJPY/ weekly

But the vehicle I trade is the ProShares Ultra Short Yen (symbol: YCS) which is a 2x leveraged product, and as we can see from this weekly chart in figure 2, price is likely to close below the most recent key pivot. This is bearish, and this key pivot, which is at 19.84, is resistance.

Figure 2. YCS/ weekly

We can break this down even more by looking at the daily chart of the Currency Shares Japanese Yen (symbol: FXY). See figure 3. All those key pivot points or areas of resistance have been taken out over the past month. A gap above 109.46 is my point to cry "uncle". This level is support and if the Yen is going higher, then this level should hold.

Figure 3. FXY/ daily

As I believe that the Yen will go lower over time, thus it will remain on radar screen. I will reconsider this option in the near term if the key support level at 109.46 fails to hold. Reversals and fake outs do happen.


Fu Manchu said...

Guy, the longer term (3Y) chart suggests to me a pivotal moment; it could break up...or down. Short term it appears to have resumed its safe haven status and will go up as long as the US market falls. (Heaven knows why, given that Japanese economy is hardly running at warp speed.)

Guy M. Lerner said...


That is why I gave the points I did; hey I could get out but get back in 2 days later

Anonymous said...

Don't fight the YCS tape. the momentum has been negative from 21.19 top. Most important a long-term sell short signal was given on YCS yesterday at 19.28. Step aside until May 27th or buy YCL.

Ryan said...


Regardless of whether or not the Yen sells off from here or has one last squeeze higher in the short/intermediate term, monthly charts suggest that it is undergoing a secular change. There is a distinct monthly positive divergence on the $$USDJPY, which is a rare and (in my opinion) powerful signal. The timing on monthly charts is always difficult, but when the turn comes, it should last years.

It is quite possible that the yen will have one last squeeze ala 1995, but this would only lead to another divergence against price and likely set up an even more vicious slingshot move since it would effectively wipe out all of the shorts if it were to occur. Perhaps it is as simple as the carry trade needing to unwind before the trend change unfolds. But whenever it occurs, I would expect a massive secular move against the yen--likely concurrent to Japan's negative debt dynamics taking over. With respect to Japanese sovereign debt issues, I think the best way to play this is through longer dated payer swaptions along with a short yen position.

D-man said...

Hi Guy, we're still good on this trade as per today's close (slight above 90).

Also, EUR/USD closed above pivot at 1.256 so it seems we won't see that 1.16-1.19 support from 2006 that soon. Maybe a bounce is due for stocks as well (we got one today) and that will help euro higher as well.

What do you think?