Potential Trade: Profiting From A Possible Decline In The Yen

As the chart below shows, since April 2009 the US Dollar has been in a long downtrend versus the Japanese Yen. Between the high on 6 April 2009 at 101.46, and the low on 28 October 2011 at 75.61, the USD fell 25% vs. the JPY.

However since the BoJ announced its latest attempt to drive down the value of the yen, the US Dollar has shown signs of strength. Since the beginning of February the USD has climbed 5.88% against the JPY and is once again testing the downtrend line (circled).

A 3 Year Chart Of The US Dollar (USD) vs. The Japanese Yen (JPY)

Chart courtesy of fxstreet.com

The current level of 81.77 also happens to coincide with the 23.6% Fibonacci retracement from the April 2009 high. A close above the trend line may present the opportunity for a move towards the 85.48 area, or the 38.2% Fibonacci.

Those looking to play a possible break out could either go long the USD vs. the JPY at the current level using a tight stop, or alternatively wait for a breakout.

If a breakout does occur, it is common for the price to come back and retest the downtrend line which then typically switches from being resistance to being support. This pullback offers another possible entry point for a trade.

The Japan situation in brief…

In a recent interview on Bloomberg Radio, Gary Shilling, author of The Age of Deleveraging, and president of A. Gary Schilling & Co., summed up the situation in Japan very nicely: “In our portfolios we are short the yen. Longer term it is really a question of whether Japan is going to be able to continue to finance its huge government debts and deficits internally. They have done that so far. Only 5% of their government bonds are owned by foreigners.” He went on to say that “10 year government bonds yield less than 1%, but if they’ve got to pay anything like world rates then their deficit will be huge and their debts could get into an upwards spiral and it could be a big problem for Japan.”

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