The widow-maker is dead. Long live USDJPY. And so as the bear was laid to rest, the bull ascended.
I knew we were getting closer to a sea change in the markets when #1: after studying a Daily Yen chart at length several weeks ago I still had no idea what the primary pattern was, and #2: I read an article that several very wealthy macro traders out of London were retiring while they were still very wealthy. Tops and bottoms always create confusion, and leave victims -- the bigger the better generally … nothing personal.
Given a picture is worth a 1,000 words I give you Figure 1: the USDJPY weekly chart:
Now everything is making sense to me…and the implications for the other yen pairs are truly exciting. Let me diverge momentarily before I start putting the egg ahead of the chicken.
A strong yen, i.e.: weaker USDJPY, has been a widespread concern amongst professionals because it showed that the powerful Japanese investor class had not bought into the global recovery as U.S. stock market investors had. Nothing made this development more clear than Japanese traders and investors continuing to forgo yield and bring money home, effectively buying Yen, rather than seeking higher interest rate overseas. Quantitative easing and the U.S. stock market was viewed as too "speculative" and Japanese investors opted for a wait and see approach. Until the Japanese currency turned the corner, on its own volition and not on government intervention, a piston was missing from the engine that powered global investment markets. That piston, in the form of USDJPY, is finding traction just ahead of the New Year.
The broad market over the last few years has been a one trick pony. As the S&P 500 went so went currencies and commodities. Every time U.S. stocks corrected - essentially every summer - currencies and commodities dove lower also, while the Yen strengthened, solidifying its role as a flight to quality currency. Yet as stocks recovered and then moved higher, and the currencies and commodities dutifully followed, the Yen never weakened. The effect was an uptrend in U.S. blue chips and a downtrend in USDJPY. These conflicting trends were counter-intuitive for a recovering global economy. A strengthening U.S. stock market told us there was hope, but a weakening USDJPY told us the world's second largest investor classes, the Japanese, were not buying into it; until now. The exciting part about this for all of us is how cheap the U.S. Dollar and the other major currencies are against the yen, particularly relative to asset class prices. In simple terms: one of the world's wealthiest investor classes is about to get back into the markets, and they are going to be picking out companies and investments in the U.S., Canada, Great Britain, Australia, and even Europe, that have weathered the Great Recession. And because the yen has been so strong, if you are a Japanese investor there is still plenty of value in assets denominated in foreign currencies. The same is true of currency markets. Look no further than the USDJPY chart in Figure 1 so see how much room there is on the upside.
We are indeed entering The Golden Age of Currency Trading.