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Does Dollar/Yen Signal Trouble Ahead?

The million dollar question from this current market move off the March lows is when will it end?  So far, I must admit, I have been surprised by the strength and length of this move.  I know there were moves of this size and magnitude following the Great Depression.  However, as much as my kids may think I lived through this period, I did not!

In our ever vigilant search for clues to the end of the rally, could it be that the greenback and the yen are flashing warning signs no one wants to see.  According to a report by Jonathan Clark of FX Concepts entitled Has the Yen Changed its Stripes,  he writes that "the cycles argue that the financial markets are within two weeks of what should be the start of a period of distress.  The exact reasons for the downward move in stocks and the accompanying decline in risk appetites will only be revealed later.  However, the increase in risk aversion should be related to growing credit losses and weak final demand as consumers struggle to rebuild their savings."

He goes on to say "Normally when this occurs the yen strengthens aggressively as there are short yen positions on both inside and outside of Japan."  We know this latter statement to be true as this was evidenced in the September/October period of 2008 and Non-commercial or "speculative" positions on the IMM are again pointing to significant shorting of the yen that can be fuel for a short squeeze.

A simple review of a weekly spread chart of the U.S. dollar and the yen, shows that this spread is approaching a signifant support level at .70 and could portend a bounce at this level.  You can see from previous bounces at this level that the market generally moves inverse to any positive move in this spread.