This text is from blog famous currency strategist Joel Kruger .
TIME FOR A CHANGE – Today my central focus is on the Yen. The currency has taken quite a shellacking since late 2012, and the pace of the decline has well exceeded my expectation. Though technicals and fundamentals have been highly supportive of this move, there are quite often other market forces that somehow prevent these types of inevitable moves from playing out at the pace we have seen with this move. I had been long USD/JPY from the 78 area and exited around 84 several weeks back after thinking that the move was already overdone. So to see USD/JPY a whopping ten big figures above my exit (after already profiting on what I thought was a big move), has been rather amazing. Still at this point, I am inclined to look at things from the other side, and am now calling for some form of a major corrective rally in the Yen, or multi-week consolidation at a minimum. I would be shocked to see any additional acceleration beyond 95 from here, and while we could still take out the major psychological barrier, gains beyond the figure should not be sustained in the short-term.
EXTERNAL FORCES – True, the Japanese government has adopted aggressive measures that carry Yen bearish implications. However, there are also external forces that could force a shift in short-term Yen sentiment, and tilt the balance a little bit back in favor of the Yen. In my view, these forces will come from global risk sentiment and performance in global equity markets. Global equity markets have performed exceptionally well over the past few years, and with some of these markets now so close to pre-crisis highs, it begs the question of whether these markets really deserve to be trading at such levels with the global economy still far from out of the woods? The performance in these markets has been more a function of incentive to buy into them on the back of free money monetary policy, and less a function of any compelling underlying fundamentals. This in my view is not a healthy reaction, and one which will soon realize a less encouraging fate.
TIMING IS ALWAYS THE TOUGH PART – I am not sure exactly when stocks will reverse lower, but I do feel strongly that this reversal will happen at some point over the course of the next 8 weeks (could be as soon as days or even sessions). And when we do see this agressive liquidation, it will fuel liquidation from other higher yielding currency plays that had been funded through the Yen. While the Yen is far from a safe haven currency play, it still has been used as a funding currency, and as such, it will likely benefit a good amount from a reversal in higher yielding currencies. Technically, there is also some compelling evidence that would support the case for reversal in the Yen’s favor (at least in the short-term).
THE TECHNICAL CASE – The breakout of a multi-month ten big figure consolidation by record lows around 75 (range of roughly 75 to 85), called for a measured move upside extension objective of some ten big figures higher towards the 95 area (85 to 95). Now that this measured move objective is here, textbook technical analysis would tell us that the market should enter a period of consolidation before even considering the next material push higher and bullish continuation. Any consolidation from here would therefore open the door for some short-term pullbacks, in which the market will seek out a fresh medium to longer-term higher low ahead of the next major upside extension. So with everyone looking for the Yen decline to continue, I am here to say that there may just be some disappointment in the days ahead.
