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Japanese Yen Is Showing Strength Now That It's the Primary "Safe" Currency


Meanwhile, US rates are coming back in, giving traders an opportunity to lighten up on or aggressively short high-grade debt.

It should be no surprise that risk currencies such as the Aussie dollar, Canadian dollar, and euro have pulled back a bit with the weakness that we saw in stocks this week. Rather than focus on the obvious, though, I wanted to look at the same trade but from a different angle this week. The trade of which I'm writing about today is the "safety" trade. But rather than looking at how weak the Aussie or Canadian dollars are, I'm interested in highlighting the strength of the Japanese yen.

Why? Well, because while the Aussie and Canadian dollars are showing a little relative weakness versus the US dollar, their weakness against the yen is much more obvious. This highlights for me the fact that US fiscal policy is being felt in the currency markets – the US dollar and Japanese yen are being viewed a little differently now rather than being lumped into the "safety" trade together.

The euro / Japanes yen has some more downside potential in the very short-term.

Click to enlarge
  • The chart above shows the euro / Japanese yen cross (EURJPY) on a 60-minute basis going back 10 days or so.
  • The EURJPY appears to be in the early stages of wave "v & 3" on the chart with a downside target for this wave at 108.821.
  • From there, we should see a consolidative wave 4 with an upside target area back up above 109.20.
  • The EURJPY should have one more down wave (wave 5) at least. Based on this short-term chart alone, the downside target for wave 5 will be 108.137.
  • These moves may not seem like much, but in currency trading, moves of 600, 400, and 1,000 pips can mean roughly the same amount of actual dollar profits on only about $3,000 of equity. Then, of course, there's the risk of total loss and extra margin requirements….
  • Even if you're not trading currencies, though, knowing what a "risk" cross like the EURJPY may be doing can help give some added perspective on your equity, commodity and fixed income trades.
The US Dollar / Japanese yen cross shows that the EURJPY is headed lower not necessarily only because of a weak euro.

Click to enlarge
  • The chart above shows the US dollar / Japanese yen cross (USDJPY) on a 60-minute basis as well. This chart looks more bearish than that of the EURJPY.
  • The USDJPY appears to be in wave iii of 3 lower with a likely downside target range of 80.28 to 80.732 (well over 1,000 pips from current levels).
  • I could be wrong on this wave count – but any close below 81.464 will tell me I'm on the right track.
  • This more bearish chart tells me that while Europe may be having their problems and that those problems are manifesting themselves in the weaker EURJPY, the USDJPY is telling me just how fanatical the Fed / Ben Bernanke are being in their efforts to keep rates (and the dollar) low.
  • This guy (Big Ben) must really be spooked by all of that Great Depression knowledge – and by the misery he went through a few years ago when he first became the Fed Chair. For them to be having such a powerful influence over the currency markets with their policies and actions is certainly attention-getting. Either something is just horribly wrong behind the scenes and we don't yet know about it OR they are overreacting and we're getting ready to see a massive inflation of asset prices as a result.
The yield on the 10-year Treasury Note is backing up my observations of the currency markets.

Click to enlarge
  • The yield on the 10-year Treasury Note ($TNX.X) has continued to correct lower as the risk markets have sold off this week.
  • This move lower in rates in the short-term is not unexpected, though, after the sharp rise in rates that took place a couple of weeks ago.
  • We should see the yield on the 10-year Treasury Note continue lower to the 2.087% level. At that point, though, I'm calling for rates to stop their descent and begin another move to the upside.
  • Perhaps that move will come on some better economic or geo-political news. Or, perhaps it will come on some signs that global inflation is becoming an issue. I always throw that out there because at some point it WILL matter.
Overall, it looks like we could have some more difficult trading in the risk assets as the global markets seek the right balance. However, at this point, we have to look at that weakness as a buying opportunity. If and when certain support levels and uptrend lines are threatened, I'll have to re-evaluate my bullish stance. Until then, look for more asset price inflation and for further results from the constant tinkering on the part of the Fed and the other global central banks.

Twitter: @tttechnalytics

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No positions in stocks mentioned.

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