The yen is telling an interesting story today…

• ragheehorner
• February 9th, 2010

Update:  Throughout this article I discuss the “yen” as in the Japanese Yen itself and the $USDJPY which ofcourse is the pair of the U.S. Dollar and Japanese Yen.

So far the yen seems pretty unaffected by today’s dollar sell-off through the major psychological level 80.00 and the Dow’s rally back up through 10k.

For most traders the $USDJPY is the risk barometer of the markets.   For those unfamiliar, here’s the Cliff’s Notes version…

Update:  ”Risk barometer” is basically my way of assessing risk appetite (equities strength) or risk aversion (a flight to safety).

As the $USDJPY rallies it generally represents the dollar gaining on the yen or the yen losing ground against the dollar.  It also means that the equities market is weak as traders/investors flock to the dollar for “safety”.  It’s a risk aversion play.

Update:  The whole “flight to safety” is not set in stone as to where the money goes.  You must follow and never assume it goes to the same place all the time.  Such as the relationship between the $USDJPY, the $INDU, and the $USDX.  The $USDJPY does not always follow the $INDU, and usually when it does not, it follows the $USDX.  I do not believe that there is a sustained flight to safety to the yen itself because that means that nations around the world are diversifying away from the dollar en masse.  Just my assessment – my opinion. I think it also reduced a yen rally to a flight to safety play.  There can be other reasons for moves higher, one such hypothesis is that the yen will benefit from other countries reducing their dollar holdings.  But I have not seen enough of this to conclude that the dollar is not longer the world’s reserve currency.  I believe it still is.  Again, this leads me to conclude that flight to safety moves still rally the dollar.

As the $USDJPY declines, we’re looking at the opposite side of the risk coin.  The yen rallies as there is more risk appetite and subsequently $USDJPY chart shows a downtrend.

We all know what the stock market did July ’09 to January ’10.  Here’s a look at the $INDU and $USDJPY.

The risk appetite play is basically borrow (buy) a cheap currency (most often the yen) in order to buy higher yielding assets (stocks).  That’s why the inverse correlation is seen clearly on the $INDU and $USDJPY charts.

This does not mean that from time to time the $USDJPY will not move with the U.S. Dollar Index ($USDX)…it can and does.  As a rule of thumb, I will watch which the $USDJPY is moving with, the $USDX or the $INDU.  This relationship can be checked both intraday and end-of-day because the psychology does shift session to session and even intra-session.  My perception of this is that whichever the $USDJPY is correlating with is usually the driver behind the move.

So the yen is telling an interesting story today as it really seems to not be moving dramatically with either the $USDX or $INDU.

So what’s the takeaway?

A couple things.  First, I personally look for price action first and then see what the surrounding fundamentals are that may be effecting near and longer term psychology –  but price rules my decisions.

I am also thinking what many of you are probably already thinking too and price action confirms this.  The $USDJPY looks uncertain here – and I’m not picking sides in this intraday sideways market cycle!  If the yen is not rallying with today’s strength in equities, what’s it waiting for?  I can acknowledge that there are some traders who feel that the February 4th sell-off discounted some of this equities strength.  The rapid sell-off from 91.08 to 88.53 showed some dramatic yen strength in the face of a strengthening $USDX.

So here’s where the rubber meets the road.  I’ve always thought all this discussion and no trading idea is a waste of everyone’s time…I will fade the floors and ceiling on the 30 minute chart.  This means I am expecting exhaustion at the range highs  and range lows.  I keep a tight 10 pip stop on these aggressive entries and if momentum continues, go with it.  A more conservative approach would be to wait for the sideways  channel or  ”rectangle pattern” to breakout or breakdown.  I’ll use the MACD Histogram to confirm the break.

- Raghee

Questions?  Comments.  Leave ‘em here at the blog!

Tickers: $INDU, $USDX, USDJPY

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