Japanese Yen Valuation Alert
The Daily chart link, (right), on Usd/Jpy shows how the pair has reached a swing point low, with technical and fundamental views coming together to form an opinion that the path of least resistance may now be long.
The technical view shows a linear regression channel that recently hit trend-line support at 88.25. The swing higher may now run through the previous support areas market with three X's, at 90.50, 91.50, and 93.50. The final target being the technical test of the top side of the channel at 94.50. If the Relative Strength Index breaks higher through the 50% area at the same time as these price points are taken out, the argument for the subsequent upside target tests strengthens.
The same daily chart shows the recent tests of support have formed two distinct swing change candles, (shown in the shaded area), as well as setting a near-term trend-line as support at the 89.00 area.
With the horizontal line indicating where the previous support broke, that will now be resistance, an ascending triangle formation is also in play. Ascending triangles tend to break in the direction of the horizontal line, in this case, long.
The historical correlation between equity movement and Usd/Jpy has been broken on the 4 hour S&P futures and Usd/Jpy chart reads, and now the pair looks to be running on its own momentum in the near-term. That is something that may allow the long-sided move to more easily play out.
The missing factor in all of this is market-wide participation, without which this set-up may just sit here spinning its wheels as fair value is argued in each of the three regional equity market open and closes.
The fundamental view that as an economy that imports raw materials, manufactures goods, and then exports finished items, the Japanese yen at these values puts pressure on the Finance Ministry's ideal value on a currency.
The pair was last at these levels in December 2008, and before that in 1995, when Usd/Jpy moved from 88.50 in August 1995 to 147.00 three years later, in a move that showed appreciation of 65%.
The reason that the currency may have slipped the net recently, and has been able to strengthen beyond the recent norm, could be attributed to the historic election results that were recently played out in Japan, something that also tied in with Japanese economic reporting of corporation results that historically instigates inflows to Japan of overseas yen at this time of year.
The decoupling of the carry trade that had Jpy as the whipping boy for currency pairs to be swapped and interest earned, has taken a while to play out, and in the time that Usd, Cad, Gbp, have joined the currencies that are now close to Japan in their own overnight interest rates.
For two sessions now the trade team have tried to work a position on the long side of Usd/Jpy, for technical and fundamental reasons. The understanding that the pair is in a strong down trend does not allow much time to sit and wait for movement that could very easily retrace back to test 88.50.
There is plenty of room top drop under 88.50, with the pair's 1995 test of 78.00 still a possibility in the unique global, post-credit crisis environment. The rule book is still getting written on the way that risk and reward are valued in the global trading environment, and therefore we have to respect the fact that if this pair does not break once a position is opened it will need some baby-sitting.
We will look to take either side of this set-up, and ideally need 90.50 or 88.50 to be taken out and held for a session. Updates will follow, and in the mean-time, patience is key.
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