The Blog

Sake Bombs Anyone?

Posted on March 23, 2016

Sake Bombs Anyone?

Posted on March 23, 2016

Sake Bombs Anyone?

IBD article 3/22/16 “New Twist to Currency Hedges”

“Global currencies have been in the news a lot lately. In December, the Fed hiked IR’s. Meanwhile, the BOJ recently tried to push its currency lower with negative interest rates. The ECB has cut rates as well. And the Chinese currency has moved lower since dropping 2% last August 2015 when the PBOC let the yuan float.”

“Despite the BOJ’s best efforts, the yen is up 8% this year, its strongest level against the USD since Oct. 2014.

 

There are three ways a currency can be manipulated.

  • Fixed rate/pegging.

  • Intervention via affect the free float.

  • Directly devalue the currency via central banks set lower exchange rates.1

After reading this article it made me think for a second. Why has the yen lifted recently? Shouldn’t it have fallen given the BOJ’s negative interest rate cut? And why has the USD fallen in recent weeks? Didn’t the Fed signal it would raise rates this year at least twice? Draghi cut rates from -0.3% to -0.4% just two weeks ago and the Euro unexpectedly shot up, which is not typical.

Usually, when interest rates are lifted by a central bank, the currency will lift too since money follows the highest yield. Since the ECB and BOJ both reduced their interest rates further south into negative territory, their currencies did not follow. When currencies zig when they’re expected to zag…what’s an investor to do when they’re bets or expectations go awry?

As a team, these types of conundrums are just what have led us to believe in technical analysis more so than fundamental analysis. We don’t care which way it zigs or zags, just that we’re on the right side of the trend. We rely on objective mathematical algo’s in an irrational and subjective market place.

So getting back to our original question: why has the Yen begun to trend upward this year? Simply put, because of its technical pattern. It looks like a reversal pattern known as a bullish saucer bottom or Cup with handle.

How to identify a Bullish Bottom Saucer with Handle:

  • The long drawn-out rounded bottoming of prices. Here, they look a touch more flat than they do rounded, but be a little flexible.

  • The preceding downtrend in which the consolidation came from. It gapped down. You can see the dashed blue line in the chart.

  • The volume in the black box begins to taper amidst the handle formation—this is typical.

  • MACD and RSI show signs of possible continuation in the uptrend. Yes, RSI is near 70 but there are plenty of times when prices get near 70, stay up there while being over-bought for some time before the trend reverses or pauses.

  • MACD is in the midst of its upside trend meaning momentum has room to grow.

You can see the two gaps further confirming the downward trend and upward trend in the blue boxes.

Fundamentally, perhaps BOJ’s negative interest policy implemented in January 2016 is beginning to take effect. Whatever the reason, as one who believes in technical analysis, I’d buy FXY given the pattern I see and price target I measured. I measured the price target to come close to 102.90. This is how you measure for the potential uptrend price target:

96.24 the high from the top of the downtrend from 7/21/2014.

-80.56 the low of the downtrend from 12/29/2014.

15.98 difference.

87.22 high of the breakout point of 3/14/16 for that week.

+15.98 difference

102.90 projected price target and distance of potential uptrend.

The take-away: Currencies are affected by investors as well as central banks and governments. But even if you know how markets move in-relation to one another there are times when the patterns speak louder than the heads on Wall St. or typical expectations.

Jos. G. Sellery

Sources:

1Chartered Market Technician Level 1 Pg. 221- 222.

“Fixed exchange rates: aka pegging—when a gov’t determines the value of its currency. Argentina set peso @ $1 from 1991 to 2002. This fixing of the exchange rate helped the country bounce back from years of contraction.”

“Gov’t floats: when Central banks set the range in which the value of the currency can fluctuate. They can buy or sell currency to maintain the range. In 2005, HONG KONG pegged its dollar at HK $7.75 to HK $7.85 to the USD and China let its currency— float within a band tied to a basket of currencies.”

“Freely Floating Currencies “almost freely floating”: the value of the currency is almost entirely determined in markets. The “almost” is included bc central banks occasionally stage and intervention. They buy and sell currencies when values get too far out of line for their liking.”1