The Japanese canary

Monthly yen chart going back to 1985 that shows the overall dollar-yen super-downtrend. It is punctuated by serious corrective countertrend moves, like the one in 1995-98 that took the yen from 80.00 to 138.00. But on the whole, we see lower highs and higher lows that form the support and resistance lines of a triangle. The dollar’s upside is capped by the top of the linear regression channel at 133.00-135.00 by mid- 2007, or by the additional parallel resistance line at around 127.00.

Traders look at a chart like this and see dwindling volatility and lesser degrees of trend. We see a cap on the dollar’s rise against the yen and it reminds us that “If you can’t buy it, sell it.”

By mid-June, we will have had four more TICS reports, which are normally delivered on the 15th-17th of each month (you can get the exact schedule as well as more detail at www.ustreas.gov/tic). Unless foreign investors change their minds about the U.S. market, or U.S. investors stop diversifying into foreign markets, we don’t see a reason for the capital flows to resume at an adequate level to fund the trade deficit. This could mean the dollar debacle is finally upon us after having been forecast for so many years. And it will be the yen that is the canary in the coal mine warning us to flee for the hills.