Saturday, 16 July 2011

USD/JPY Is In An Interesting Place

I very rarely look at the USD/JPY charts, maybe only once a year or so. This is perhaps surprising, given that I trade currencies, and the Japanese Yen is the second largest component of the US Dollar index.

Recently I subscribed to Peter Brandt's blog, and this week he posted an item titled $USDJPY Has the Bank of Japan Capitulated?

At the point of writing these words I have still only skimmed his post, and the one thing that jumped out at me, stuck in my mind, and sparked my interest is that the USD/JPY is close to a possible break of 16 year lows.

The benefit of only skimming his post is that I don't remember the trend lines or patterns that he drew on his charts. Of course I am not saying that his charts lack interest or value, only that it is best to look at any market with fresh eyes, and no bias. His scenario may well play out perfectly, but that's not the point, and not important. Having read his book, I know that he doesn't like to use charts for market forecasting, only for identifying trading edges.

Here's what I see.

Monthly candlestick chart going back to the mid-90s. Yes, fresh lows, but also a huge wedge, which warns of a possible bullish reversal back toward where the wedge began forming ie. the 120 area. A break above the trend line at 83 would raise the odds for the bullish scenario. That scenario, suggesting USD strength, aligns with the EUR/USD down trend that appears to be taking its first baby steps on the daily chart, and also the big picture 0.618 retracement top for the AUD/USD. 

Daily candlestick chart for the past year. The trend channel has contained most of the market action for that period, and suggests a possible rally in coming days, initially targeting the top channel line. Failing that, a break of this week's lows would lead to further weakness.

I will be watching the USD/JPY more closely from now on. In fact, given that finely poised daily chart, I wouldn't bet against me placing some trades on it in coming days.

ASX 200 and S&P 500 Compared, Both Priced In USD


As an Aussie, I have been a little disheartened that from the March 2009 stock market lows, the US S&P 500 rallied 107% through to May 2011, while the ASX SPI 200 only managed to rally a Fibo 61.8%, peaking in April 2010.

That said, I've always known the comparison was between apples and oranges, as the S&P 500 is priced in US dollars, while the ASX 200 is priced in Aussie dollars.

If we price the ASX 200 in US dollars, we see that it has been closely correlated with the S&P 500 since before the GFC / Great Recession began. In fact since the March 2009 bottom, the ASX 200 (USD) has slightly outperformed the S&P 500.




A lesson for Australian investors in Aussie stocks looking for returns in Aussie dollars, is that they will continue to struggle while the AUD/USD continues to rise. International investors in Aussie stocks, looking for returns in US dollars, will do better, so long as the AUD/USD continues to rise.


* Notes on chart. ASX 200 (USD) starting price adjusted to be the same as the S&P 500 starting price. Stock market data (closing monthly prices) sourced from au.finance.yahoo.com, currency data (average monthly prices) sourced from fxtop.com.