Shorting the Japanese yen is “the trade of the decade.”~ John Mauldin
This trade has been hammered out of shape in last 8 months.
Japanese policymakers have done everything possible to weaken Yen and yet what has happened in last 8 months: unprecedented monster appreciation in Yen. Here's USDJPY chart. A declining trend on the chart = sharp appreciation in Yen.
What has confused many - this strengthening of Yen has happened despite Japanese Central Bank adopting Negative interest rates policy which was designed purely to weaken Yen.
Let's go back to 2012: Abenomics and Yen Policy
Shinzo Abe, the current Japanese PM - came to power on promise to boost economic growth and his prescription: weak Yen, strong exports.
The policy did work and from 1 USD = 77 Yen...Yen depreciated to 1 USD = 125 Yen by June 2015. After such a strong depreciation move - it was expected that Yen might trade sideways for few months/yrs before resuming depreciation again. But no trade works in linear fashion. It tests the conviction.
The Big Picture
Here's USDJPY weekly chart
If we take a last 14 year chart - there are following observations we can make -
1. USDJPY has stiff resistance at 125 - Triple Top. No wonder this time also - USDJPY declined from 125.
2. The current pullback looks like a deep pullback and USDJPY can pullback to 200 week ma which as of today stands at 105-106
"We will cut the interest further into negative territory if judged as necessary." ~ Bank of Japan
With Bank of Japan and Japanese policy makers determined to weaken Yen - it's only matter of time before that trend resumes again. The real alarming depreciation of Yen will now happen only when it breaks past 125
LESSONS WE CAN LEARN
No matter what you believe: it pays to book profit at resistance. Buy and Hold investors can get tested by real deep pullbacks. Once, deep pullback sets in - no one knows what future holds for the asset. It can go either way
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Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers