The Chart du Jour

An Important Moment: Yen

July 18, 2000

By, Barclay T. Leib

When the Japanese decided to leave their interest rates unchanged at near 0% several days ago, most pundits considered it a bullish decision for global capital markets. We are not exactly sure what it represents for equities (which continue to tease and annoy in their chop), but it does appear to have sent USD/JPY to the verge of an important upside breakout pictured below.

Chart produced using Advanced GET End-of-Day

As you can see, we have had a bit of fun marking up this chart with various Fibonacci retracements (from the 1998 high to the 2000 low, from the 1999 high to the 2000 low, from the 2000 low up to 61.8% of the 1999-2000 decline). We have also added in both the 100-day and 200-day day moving averages.

What suddenly becomes strikingly clear once our penmanship is finished, is that there are two obvious target levels to the upside: clusters of both Fibonacci retracements and moving average resistance. These levels are approximately 113 and then 119. We expect to see both -- 113 in short order and 119 after some work at the first level.

U.S. dollar longs here with stops set toward 104.50 continues to be a trade that is a good risk-reward situation.

Fundamentally, with a G8 meeting forthcoming in the next few days, might we finally see some admission (let that read, headline) that since 0% interest rates haven't done the trick, undue yen strength just has to go?

Japanese investors would effectively be given the choice: stay domestically invested and play the JGB carry game (while it lasts - since overtly pushing the dollar higher might with time be the first real dent in JGB's armour), or try to get even healthier by shipping a bit of money abroad, with the tacit guarantee the dollar is not going to go down. Maybe two choices are better than one as the Japanese central bankers continue to grope towards a great reflate policy.

A positive eye on gold denominated in yen might be appropriate as well, as not every marginal dollar flowing out of Japan will be particularly keen to go straight into U.S. stocks at outrageous P/E levels.

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