Week Ended July 29 Filled With Superlatives For Yen-Dollar Exchange Rate Volatility

| About: CurrencyShares Japanese (FXY)


First time ever for NIRP Crash Indicator to have 3 signal changes in one week.

Dollar declines by 3% versus yen on final day of July.

Exchange rate volatility heightens during weeks of multi-central bank policy meetings.

NIRP flickers between ORANGE and YELLOW and closes at ORANGE.

The superlatives for the volatility of the exchange rate of the Japanese yen and U.S. dollar for the week ended July 29, 2016 continued until the close of the currency markets for the last week of July 2016. With a peak to trough decline of 1.9% for the dollar versus the yen over the 24-hour period (07/28/16 9:00 AM-07/29/16 9:00 AM), the NIRP Crash Indicator went to ORANGE from its YELLOW reading. The signal had been at YELLOW since prior to the opening of the U.S. market on July 27, 2016. At the Friday weekly close for the currency markets, the dollar fell to 102.1 yen and declined by 3.0% as compared to Thursday's close at 105.27 yen.

For the week ended July 29, 2016, the NIRP Crash Indicator issued three signal changes and flickered between YELLOW and ORANGE. The signal entered the week at YELLOW on Monday went to ORANGE on Tuesday back to YELLOW on Wednesday and will close the week at ORANGE. The week marked the first time ever that there were three signal changes. For the signals to change requires a peak to trough, or trough to peak, change of greater than 1% in the exchange rate of the dollar-yen. I had predicted that the volatility would increase but not to the level that I witnessed. See "NIRP Crash Indicator's Stats Indicate Volatility To Increase Week Ending July 29", July 25, 2016.

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What has caused the extreme exchange rate volatility for the yen and the dollar is the heightened anxiety about potential policy changes from the scheduled policy meetings that had been held by the U.S. Federal Reserve and Bank of Japan during the week ending today. The reason for the almost 3% spike for the yen versus the dollar on Friday, July 29, 2016, was because it had been widely anticipated that the Bank of Japan would announce that it was adding significant stimulus upon the conclusion of its July 29 policy meeting. That did not happen.

Not coincidentally, the NIRP Crash Indicator's signals have a tendency to become more volatile during those weeks that the world's three key central banks, including the European Central Bank (ECB), Bank of Japan (BOJ) and U.S. Federal Reserve (FOMC), hold their scheduled policy meetings.

The NIRP's ORANGE signal went off before the market opened on April 29, 2016, the day after the April policy meetings for the Federal Reserve and the Bank of Japan had concluded on April 27 and April 28, respectively. The signal almost went from YELLOW to ORANGE after the ECB's July policy meeting had concluded on July 21, 2016.

In my March 15, 2016 report, I had predicted that volatility would pick up for the markets around the dates that the scheduled meetings would be held by the European Central Bank (ECB), Bank of Japan and Federal Reserve throughout the rest of 2016.

During the prior period in which the signal was at YELLOW from the market's close on July 1, 2016 through the market's opening on July 26, 2016, the S&P 500 increased by 3.5%.

The NIRP Crash Indicator has proven extremely reliable. From its launch on March 1, 2016 through July 1, 2016, the NIRP Crash Indicator had eight YELLOW, ORANGE and RED signal changes. Investors following the signals were able to effectuate no-cost strategies to protect themselves when risk in the markets during this four-month period was highest.

For the three prior periods after the signal went to pre-crash ORANGE, the S&P 500 declined by 0.89% to 1.4%. On June 24, 2016 - the only occasion over the four months within which the NIRP Crash Indicator signaled a RED all-out crash was underway - the S&P 500 had fallen by 4.9% at the close of the second trading day following the signal change. During those periods when the NIRP's signal was YELLOW, the S&P 500's changes ranged from a decrease of 0.94% to an increase of 7.0%.

Had an investor utilized the NIRP Crash Indicator's three signals to purchase long and short ETFs or S&P futures contracts to hedge their portfolios, they would have made a net profit from trading the hedge instruments during the four months. Therefore, they would have had no cost to protect their portfolios against a crash during the periods that the ORANGE and RED signals were in effect, which is when the S&P 500 was at its highest risk. See "NIRP Crash Indicator ideal for Futures Hedging and Trading", May 11, 2016.

The NIRP crash signals are published and freely available after the close of the U.S. stock market each day at www.dynastywealth.com:

  • RED - full crash
  • ORANGE - pre-crash
  • YELLOW - caution
  • GREEN - clear

Impetus for development of the NIRP Crash Indicator was my research conducted on negative rates and the extreme volatility they caused, and are still causing, for the capital markets. See "Japan's NIRP Increases Probability of Global Market- Crash Probability", February 26, 2016.

For the NIPR Crash indicator to decrease from pre-crash ORANGE, or full crash RED, to caution YELLOW requires that the exchange rate between the yen and dollar be stable for an extended period of time, or that the dollar advance significantly versus the yen. An increase in the indicator from YELLOW to ORANGE requires a steady advance or a significant one-day advance of the yen versus the dollar. The NIRP Crash Indicator cannot go to an all clear GREEN signal until the negative interest rate policies being utilized by the world's central banks and the negatively yielding securities trading in global markets have been eradicated. When the NIRP Crash Indicator was developed, there was no intention for there to be a "buy" signal other than GREEN. However, because of its proven reliability, the YELLOW signal, by default, became the buy signal for those who wish to trade the markets.

The reliability of the NIRP Crash Indicator makes it ideal for deploying a strategy to purchase short-biased ETFs (Exchange-Traded Funds) and/or equities futures contracts to hedge or protect a portfolio when the RED or ORANGE signals occur. This strategy is tantamount to having crash insurance.

The performance in the table below depicts that within five days after four of the five ORANGE and RED crash signals went into effect, the S&P 500 declined by 1.0% to 4.91%. That the signals can potentially elevate from a YELLOW to an ORANGE or a RED signal enables an investor to utilize short ETFs and S&P 500 futures contracts as a hedge to protect a portfolio against a significant crash when a RED or ORANGE signal goes into effect.

Statistics for Periods NIRP Crash Indicator Warning Signals in Effect 3/1/16 to 7/29/16, Total Days, Days to Low, S&P 500 % Changes @ Low, and End of Warning Period




Days to Low

% Change
@ Low

% Change
@ Period End


4/01/16 - 4/22/16






4/29/16 - 5/09/16






6/01/15 - 6/23/16






6/24/16 - 7/01/16






7/26/16 - 7/27/16





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The performance in the table below depicts that the S&P 500 performed very well during the extended periods that the NIRP Crash Indicator was at YELLOW. For the three instances that YELLOW was in effect for more than 15 days, the increases for the S&P 500 ranged from 1.71% to 7.00%. Hours after the signal went from ORANGE to YELLOW after the market's close on June 23, the signal switched to RED prior to the market's opening on June 24, 2016.

S&P 500 Performance Statistics for NIRP Crash Indicator: Periods When YELLOW Signal Was In Effect 3/1/16 to 7/26/16, Total Days and % Change for Period


Total Period Days

% Change @ Period End

3/01/16 - 4/01/16



4/22/16 - 4/29/16



5/09/16 - 6/01/16



6/23/16 - 6/23/16



7/01/16 - 7/26/16



7/27/16 - 7/29/16



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The primary metric I discovered that powers the NIRP Crash Indicator is the sudden increase in the volatility of the exchange rates of the yen versus the dollar and other currencies. The significant changes in the yen to dollar exchange rate accurately predicted the crash of 2008 and recent declines of the markets to multi-year lows in August of 2015 and February 2016. In my April 11, 2016, article entitled, "Yen Volatility Is Leading Indicator For Market Sell-Offs" and my video interview below entitled, "Yen Volatility Causes Market Crashes", further details are provided on the phenomenon of the yen being a leading indicator of market crashes.

The only logical conclusion for yen volatility, or its sudden and significant increases versus the dollar being a leading indicator of crashes, is that the Japanese yen and the U.S. dollar are the world's two largest single-nation reserve currencies. For this reason, the yen is the best default safe-haven currency utilized by investors during any U.S. and global economic and market crises. When crises unfold, historically the U.S. dollar - by far the world's most liquid and largest safe-haven currency - is susceptible to dramatic declines until the storm has passed.

Savvy investors know that the U.S. is, unquestionably, considered the world's leading economy and markets. They know that upon a crash of the U.S. stock market, the initial knee-jerk reaction would be a simultaneous crash of the U.S. dollar. Because Japan has the world's second leading single-nation currency, the yen is currently the default hedge currency. Even though the euro, arguably, ranks with the U.S. dollar as the world's top reserve currency for liquidity and circulation, it is not the preferred hedge against the greenback. The euro is shared by 19 of the European Union's member countries that have wide-ranging social and economic policies, and political persuasions. For this reason, and also because Japan is considered to be one of the most fiscally conservative countries on the planet, the default currency is the yen. The U.S. dollar does not experience extended crashes versus the Swiss franc and the British pound sterling during times of crises because each of the underlying countries has economies much smaller than Japan's.

The only way to trade or hedge a currency is by pairing it with or tying the currency to another currency. Therefore, to effectuate the equivalent of a short sale for a currency (e.g., U.S. dollar) would require that the seller utilize dollars to purchase a currency (e.g., Japanese yen) that they believe will appreciate versus the paired currency (e.g., U.S. dollar).

Based on my continuing research coverage of the spreading negative rates and the devastating effect that they can have on the global banking system, the probability is high that the major global stock (indices including the S&P 500) will decline significantly by 2018 at the latest. My April 15, 2016 article entitled, "Negative Rates Could Send S&P 500 to 925, If Not Eliminated", provides the rationale supporting the S&P 500 potentially declining by more than 50% from its July 2016 high. I highly recommend viewing my 9 minute 34 second video interview by SCN's Jane King entitled, "Why Negative Rates could send the S&P 500 to 925".

The mayhem in the markets on the trading days of June 24 and 27, 2016 which followed the NIRP Crash Indicator's signal going to RED further attests to the reliability of its signals. See also May 3, 2016, post "NIRP Crash Indicator's Sell Signals Very Reliable For April 2016".

The following reports and articles covering the NIRP Crash Indicator and the yen are also recommended:

In Summary

With the NIRP Crash Indicator's ORANGE signal in effect, the shares of the following long oriented ETFs, including the Dow 30 (NYSEARCA:DIA) and S&P 500 (NYSEARCA:SPY) should be avoided. The Dow 30 leveraged (NYSEARCA:DDM) (NYSEARCA:UDOW) and the S&P 500 long ETFs (NYSEARCA:SSO) (NYSEARCA:UPRO) have even more risk with the ORANGE signal in effect.

Conversely, I am recommending the following leveraged short ETFs, the ProShares UltraShort Dow30 ETF (NYSEARCA:DXD), the ProShares UltraPro Short Dow 30 ETF (NYSEARCA:SDOW), the ProShares UltraShort S&P 500 ETF (NYSEARCA:SDS) and the Ultra Pro S&P 500 (NYSEARCA:SPXU).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.