02/17/12: While the US dollar index is little changed this week, the Japanese Yen has broken down materially. The long standing bull market has reversed and suggests it may need to go through a natural correction process of the recent multi-year run. Coincidentally, a bottom has formed in the Eurodollar market. While rather wide, it does suggest that the credit crunch begun last year has abated for the time being. If this is indeed the case (the reflation of the world economy) the notion does support a Yen bearish stance and further appreciation of both equities in particular and commodity prices in general.
This week I thought we ought to take a good look at the Japanese Yen. If one is to believe that a top has formed in the Yen (double top breakdown currently working from 12783) then there may be far sweeping fundamental implications going forward. The Yen itself has been quite a rise over the past few years. Since the US Federal Reserve lowered its key borrowing rate into the same range as the Japanese, there has been a definite preference for the Yen over the Dollar. The new 'safe-haven' flow pushed the Yen to rise to historic levels, but that may be changing. As mentioned above, the fact that the Eurodollar market (which is the US corporate short term interest rate market) has bottomed and equity prices are pressing historic highs suggests fear is leaving the market and that the world is reflating once again. In short, the 'safe-haven' trade seems to be over for now.
So if indeed the 'safe-haven' trade is over for now, where ought one to expect to see the Yen move to over the coming weeks/months ahead. My primary target here is a 50% retracement of the past 2 year move. Currently that 50% level is in and around the 11900 area. Considering the short signal came in on a move through 12783, there is a potential 800 plus point gainer here. One ought to risk up to recent resistance (the highs from 3 weeks ago at 1.3134) or about 350 points. This trade represents a greater than 2:1 reward to risk ratio so is definitely worth considering. Should we get a daily bounce into resistance and then some sort of failure I will look at a June 121 put option (currently 0.00970). At 11900 this option will have an intrinsic value of .02000 or more than double today's price - but I think we can get it a little cheaper
That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.therationalinvestor.ca/RI_Tradents.php#wctsspotlightthe_rational_investor@yahoo.com
http://www.therationalinvestor.ca
