Yen Glows Amid Global Downturn

The stampede out of equities has driven investors towards safe haven assets such as the Japanese yen -- a currency that has risen sharply this year as its appeal grows whenever risk appetite wanes. With the financial crisis expected to intensify, analysts are now expecting further support for the low-yielding yen. Just how much higher can it go against the U.S. dollar?

Dollar and Yen
Dollar and Yen

In the FX market, technical analysis provides very good solutions for short term trending and rally behaviour. It is an effective traders tool. Broader currency movements are heavily influenced by political considerations and politics does not fit well with technical analysis.

These caveats are relevant when we look at the JPY-USD daily chart. The feature that jumps off the chart is the rounding pattern that started in March 2008. It's not a perfect pattern.

The blip above the upper edge of the pattern in August must be considered when assessing the reliability of the pattern. The retreat away from the pattern line in November also reduces compliance with the pattern. When price activity matches the chart pattern construction exactly then we have a high level of confidence in the pattern targets. The greater the non-compliance with the perfect chart pattern, the lower the level of reliability for the pattern targets.

Additionally a rounding top pattern develops at the top of a trend rise. This rounding pattern develops as part of a retreat that started in mid-2007. There are many features suggesting our analysis should be applied with caution.

guppy dec 2 yen.jpg

The rounding top is a long term trend reversal pattern. In stocks and Indices it is used to set minimum downside targets as we have discussed in previous columns when analysing the activity on the S&P 500. When we apply this same analysis method to the JPY-USD daily chart it delivers a downside target near 83. We use two separate approaches to validate the targets.

The lip of the rounding top is located near 96. The rounding top pattern is invalidated by a sustained rise above 96 that is outside the round top trend line. Increments above 96 inside the rounding top pattern are not important. The pattern is invalidated when price moves above the curved trend line used to define the rounding top. A move above 96 under these conditions sets an initial upside target near 102.

A retreat away from 96 confirms resistance at 96 and the strength of the rounding top pattern. The downside chart pattern projection target near 83 is assessed against historical support activity. When the projected target matches previous support activity it increases the reliability of the target projection.

When we shift view to a monthly chart the landscape between support around 102 and 83 is bleak. There is minor support near 86. In 1995 the JPY-USD chart dipped to 80. It was part of an inverted head and shoulder pattern. The neckline for this inverted pattern was at 96. This is the same level as the base of the rounding top pattern on the current daily chart.

The pattern of historical activity suggests there is a high probability the JPY-USD will move towards 86. The chart pattern analysis suggests a temporary dip towards the target level of 83. Historical activity suggests a rapid spike low towards 80 is also possible. The chart pattern is not perfect, but its bearish significance cannot be ignored. There is a high probability of a test of historical support near 86.

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