The Rising Yen

Last month’s article (“The hammer and the yen,” Currency Trader, July 2007) discussed a potential trend reversal in the Japanese yen (JPY) that is developing the way we feared. So far the yen has risen about 4.00 points from the June 22 low at 124.15, and no matter what indicator you draw on the chart, it’s a clear reversal.

The yen staged a breakout over the standard error channel drawn from the March yen high. The current price is well over the red 20-day moving average and less than 100 points from the green 200-day moving average — the latter usually considered the “long-term” average that often acts as resistance, like the channel top. Price has also surpassed the previous highest high from early June (gold horizontal line).

It’s interesting that on the basis of the relative strength index (RSI) and the stochastic oscillator, two indicators used to signify overbought or oversold (not shown), the yen is still “weak” and hasn’t even headed up toward the overbought level. This implies the up move may have a long way to go.

Drawing the standard error channel starting farther back in time (from the May 2006 high of 109.00) shows the current move’s trendline would meet the upper boundary of the channel at 119.50 sometime around Aug. 20 if it continues at the same slope (Figure 2). This perspective of the channel shows the current yen move to be only a secondary correction of the bigger primary down move. This is probably the correct interpretation, but it doesn’t pass the “So what?” test if you are trying to trade the yen. The bottom line is, if you are trading the yen, you have to be long.