Phase 3 for JPY Crosses Could be Here Soon

The single most reasonable explanation part of
the financial media came out with, following the Japanese Yen’s sudden
volatility blowout we saw earlier in the month, was money fleeing back to Japan
in search for imminently higher interest rates.

I know markets can be inconsistent, but that
inconsistent to the point of shifting from a frenzy of selling to one of buying
in a matter of days if not hours, stirring around a ‘fundamental’ premise that
had virtually remained un-altered – well, that is leaving me in a bit of wonder.

It seems like the markets discounted a possible
January rate hike in Japan, and that as a JPY positive, for only about 72 hours
of active trading, for then the whole premise vanished just as swiftly as it was
adopted. It looks like the ‘single bullet theory’ being once again applied to
the fundamental background of a hugely liquid market under public scrutiny.

My own take is there may be no ‘fundamental’
explanation reasonably capable of deconstructing the Japanese Yen’s
counter-trend movement which the currency witnessed via its cross pairs just a
couple of weeks ago.

I wrote in an article published here on December
21st, ‘I am not an astute forecaster or even commentator of fundamental events
and developments – as I also like to think the next major move in the JPY cross
pairs will prominently be a technical one i.e. a sudden rearrangement of demand
and supply will be triggered mainly as a result of overstretched conditions that
have grown embedded in the price itself.’

I continue to perceive now what I suspected
several weeks ago it could happen, I perceive the Japanese Yen might have
already acquired a certain ‘critical mass’ – that is, a state of severe
disequilibrium sufficient in itself for a serious rearrangement of market forces
to happen, one that would not any longer need ‘fundamental’ triggers or

I think that a strong, reinforced wave of JPY
renewed pessimism may now be able to cut through the financial media – perhaps
even more exacerbated than what we were able to witness during the last days of

Nonetheless, given the already overextended
environment, a potential Japanese Yen buying opportunity along the currency’s
cross pairs – either it will confront the most discouraging media reports, or I
see very little room for the success of a contrarian positioning.

As far as I am concerned, I have been just
standing aside as of late – reinforcing that the ways in which I observe and
stand prepared to deal in highly liquid markets remain mainly technical.

None of my recent ‘fundamental’ hunches proved
right – as China did not revalue the Yuan, and the Bank of Japan eventually
decided to leave interest rates unchanged in December despite some intriguing
chattering several central bank officials had promoted beforehand; still, each
and every time I as of late advised myself against placing an early bet on the
Japanese Yen, my reasons were all of a technical nature.

All these being said – while watching charts of
highly liquid markets, developments that are most supposed to raise my attention
should consist of three main phases chronologically ordered as follows: 1) a
steady trend, 2) the trend getting ‘out of hand’ i.e. price action becoming
overstretched, sometimes parabolic, 3) the occurence of an ‘anomaly’ with
potential to damage, sometimes even reverse the trend, offering me as well
proper terms of a positioning engagement.

On terms of my own perception, phase 1) has
already been accomplished by most JPY crosses. Then, recent price action, as
well as the Japanese Yen being nowadays associated with various ‘fundamental’
stigmas – like Reuters’s ‘low-yielding’ – are signs that phase 2) is also in

Nonetheless, even though I almost started to think otherwise earlier in the
month, now I perceive phase 3) may still be ahead.

With the technical data now at hand, I have a
couple of ideas about how the climactic phase 3) may look like.

First of the ideas still assumes the Japanese Yen
reaching a blow-off stage via most of its cross pairs. Given the currently
overextending environment, there is an increasing chance these markets may at
some point collapse under their own weight (following charts of the EUR/JPY and
the GBP/JPY copyright, data feed: FXCM).

The second scenario interprets price action of
the Japanese Yen versus the US Dollar eversince December 2005, in the weekly
chart timeframe, as a huge ‘2B bottom’ pattern currently still in development
(following chart of the Japanese Yen copyright

Interestingly, the latest Commitments of Traders
reports show the sentiment surrounding the Japanese Yen has been growing
extremely bearish over the last several weeks – something that could actually
match the case of a ‘2B bottom’ approaching its climax.

I do not advance a verdict that an extreme reading of market sentiment
automatically leads to a ‘2B bottom’ sort of technical appearance, but remember
this chart pattern ultimately spells ‘panic’ – as a matter of fact, it may well
stand as the most panic-driven chart pattern and trading setup I have ever
experienced during my very early trading years – so what I can do right now is
gathering any early signs and premises.

This second case scenario is also a new challenge
for me. What I have thought during the latest months was that if a major JPY
opportunity was to present itself, it would primarily do so via this currency’s
cross pairs. Now I presume the Japanese Yen may as well chart a notable
opportunity against the US Dollar.

But either way these markets under scrutiny will
turn, I suspect phase 3) of the sequence above mentioned may start as a movement
which the financial media will once again find difficult to explain. After all,
conventional theories may be of little use in deconstructing a market stage
which most probably will not be conventional in the first place.

Mihai Nichisoiu
started to trade currencies first in the local futures
market, then in early 2002 moved to dealing in the wide foreign exchange. Since
the beginning of 2004, Mr. Nichisoiu has become mainly engaged in building a
personal long-term track record in the sense of posting high rates of return
only if at the expense of tight and rigid approaches of risk. Mr. Nichisoiu won
the August 2005 edition of a popular global demo trading contest, after
constantly achieving top rankings during an 11-month long participation. As a
currency speculator, Mr. Nichisoiu is also actively involved in managing and
providing counseling and advisory to a small number of long-term private

Mihai Nichisoiu can be contacted via his recently established, personal website