The Yen Rally Is Flimsy — Here’s Why
Oil, FX & The Economy
There can be little doubt that the nagging rise
in oil prices is having an impact on the markets. Witness the recent moves in
the Yen, bonds, and the stock market. Oil hit yet another high yesterday. So
while there are obvious implications, mainly higher inflation and possible
slowing of growth, these are problems that have a direct impact on investors
since they are typically not geared towards making short-term adjustments.Â
Nonetheless, as traders, we can use these developments to identify medium term
and short-term trades, if technicals confirm.
As mentioned in yesterday’s column, I am not
terribly compelled to add additional FX exposure at this point unless there are
some really obvious set-ups. Nonetheless, the rise in oil prices may ultimately
result in just such a trade. A recent study done by Goldman Sachs looks at the
impact on sustained high oil prices.
While this study is interesting and does help
frame a game plan as we move into the 4th quarter, it does not have an immediate
use for traders. The new high in oil prices for instance on Tuesday did not
result in a weakening of the Yen, contrary to all previous price action in
recent weeks. However, traders like ourselves noticed that on a technical basis,
the hourly chart of the USD/JPY broke down last week and has shown no clear sign
of offering compelling long set-ups. As with most trades, technicals override
macro-analysis.Â
Nonetheless, the USD/JPY has some decent support
at 109.50-109.60 and might represent an aggressive long entry point if this
level holds. The downside is that you are fighting a near-term down-trend.Â
However, with oil prices persistent to the upside and no follow through in the
Nikkei, the recent rally in the Yen seems to be rather flimsy.
I am still of the belief that you have either put
up some numbers for August at this point, or you hit the golf course and wait
until after Labor Day. While I now that this approach does sit well with 95% of
all traders, it is probably the best course of action. While all markets never
respond to one’s will and determination, the FX market is far less forgiving to
such feeble efforts.
As always, feel free to send me your comments and
questions.