This Is What The Macro Evidence Says About The Yen

  • October 5, 2004
  • Dave Floyd


As mentioned in yesterday’s piece, the knee jerk reaction in the
dollar, which appeared over after last Thursday’s hard sell-off, was once again
haunting traders.  For now we are avoiding dollar-based pairs until some
“normalcy” returns to the tape.  Our longs in EUR/GBP and AUD/NZD are working
fine without the volatility.

Nonetheless, it is worth
noting the current technical and macro backdrop in USD/JPY.























Source:  4Cast

The back-up in yields in
the US may very well signal higher rates, albeit not at the same pace given that
the BoJ is still on hold until well into 2005, in Japan.  This can be seen in
the graphic above.  Historically there has been a positive correlation between
10-year Treasury yields and 10-year JGB yields.  Also note that in the last 5
days, that correlation stands at a high of 0.92.  At a time when rising oil
prices are having a negative impact domestically (Japan), higher rates will
certainly not help.




Source:  4Cast

Higher oil prices, as seen
above, also tend to weigh on Nikkei performance.  So while the Nikkei has done
well over the last two sessions, recovering back above the 50 day EMA, the macro
evidence support a lower Yen in the days to come.

The charts support this
macro argument as well.  The bear trend line on the daily chart (from the June
high) has been breached and is now serving as support, 110.38.  Momentum has
clearly shifted higher on both daily and weekly charts.  The next critical
resistance is 111.40, a weekly bear trend-line. 



It would appear in the
days to come, that this long in USD/JPY represents a solid trade in the making. 
With a fair amount of data due out this week, especially Friday’s job report,
excessive volatility is still possible though which may easily take out stops.

As always, feel free to
send me your comments and questions.


Dave

 

Â