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Why the Yen May Be About to Rise

Wednesday, 16 Jan 2013 | 3:47 PM ET
Expect a Short Term Pullback in the Yen
Jonathan Cavenagh, Senior FX Strategist at Westpac Institutional Bank tells CNBC's Cash Flow why he's expecting a short term pullback in the yen.

The yen has been sagging since before the December Japanese elections, and it has managed to plumb depths that central interventions haven't come near.

But that pattern could be changing for the near term, according to two currency strategists.

Jonathan Cavenagh, senior FX strategist at Westpac Institutional Bank, told CNBC that while the Japanese government has been extremely effective at talking down the yen, that may not be enough to sustain recent low levels.

"The market's obviously very long dollar-yen at the moment," he says, but "the risks in the period ahead are a lot more two-way price action."

The problem, Cavenagh says, is that "it has been all talk, and we haven't seen any concrete plan" to stimulate the economy in an effective way. While in technical terms, he thinks the dollar still looks poised to strengthen against the yen, and he does believe that trade has potential over the medium term, "we still think we're going to see more meaningful pullback at some stage over the next month."

Bull or Bear Market
Andrew Unangst | Photographer's Choice | Getty
Bull or Bear Market

George Davis, chief technical strategist at RBC Capital Markets, also sees dollar-yen possibly heading south. Davis says that in technical terms, warning signs are flashing.

"Price patterns over the past three days suggest that bullish momentum may be waningvia the formation of (1) a hanging man pattern on Friday, (2) a doji pattern yesterday and (3) a bearish engulfing pattern," he wrote in a note to clients.

Davis also argues that the dollar-yen pair seems well supported at 88.38 right now, but "a daily close below this level would be the catalyst for a deeper short-term price correction."

The bottom line: be careful out there.

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