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Busch: Your Next Move With the Yen

Wednesday, 30 Mar 2011 | 12:13 PM ET
Yen coins and banknotes
Image Source | Getty Images
Yen coins and banknotes

On March 18th, I put out a recommendation for a US dollar against Japanese yen trade and the reasons for it.

Now that the yen has weakened, here's your next move.

To recap, my March 18 recommendation was as follows:

Buy US dollar/Sell Japanese yen

Entry at then-current levels of 81.00

S/L at 79.75 (previous all time low)

T/P at 85.75 (86.03 is where Japanese exporters are profitable and will sell)

Here were the reasons:

The currency markets are unique due to a massive player in the markets: governments.

They can choose to intervene to buy or sell their home currency depending on the moves which they deem “volatile”.

While governments act infrequently, they usually act in extremely large amounts.

March 17th-18th was a great example as the Bank of Japan bought USD and sold Yen in a trade estimated at over $25 billion.

Including the rumors from March 17th, the total move drove the US dollar from 76.25 to 82.0. A 7.8% move in 48 hours!

The key to successful intervention has three components:

  • There needs to be more than just one country intervening.
  • The amount of intervention needs to be large and persistent.
  • The currency rate should be out of line with economic fundamentals.

An example of when intervention didn’t work was on September 15th.

Japan intervened to buy US dollars and sell Yen. It moved the US dollar from 83.00 to 86.00 in 2 days, but never went any higher. It eventually fell to 83 by Oct 6th and then to 80 in November.

The most recent intervention met all three criteria and that’s why I went with this trade on March 18.

Today, now that the yen has weakened, I recommend cutting the position in half at current price (83.00ish). Also, move your stop loss up to the entry point of 81.00. Now, we have a trade that has already made 200 points on half the position and a zero loss on the other half. Target remains 85.75.

Risk management is critical for all trading and adjustments to positions to reduce risk will keep you profitable. Currently, all the markets remain volatile and taking the right risk when you want it is critical.

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a contributor to CNBC's Money in Motion Currency Trading.You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch .

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