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Monday, December 24, 2012

Japanese Yen outlook

Today I want to talk a little about Japanese Yen and my outlook for it in the nearest future. It is not a big secret that most positions in fx market has been opened in Japanese currency pairs and these have made the biggest moves in 2012. Yen has fallen more than 1500 pips against Euro since the end of July (2012) and quite a lot against other European, commodity currencies as well as US dollar. Both direct and indirect comments from Bank of Japan and newly elected politicians on their willingness to see Yen weaker and deflation finished caused Yen to depreciate significantly. Most expect the currency to continue going down in 2013 too. Is this bearishness towards Yen really going to continue next year?

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First of all we have to remember that markets are run on expectation, not realization. Some currency may strengthen on positive expectations and weaken significantly when those expectations are realized. Why? Because by going up market prices in those expectations and if realization does not surprise the market it will usually not continue going up. The same can be said about negative expectations. Realization of those expectations does not have as strong effect as the very expectations do. 

Now, the newly elected government may have a lot of plans to implement, but whether they will do that and how fast as well as how long it is going to take remains a question. It is very probable that expectations have reached their maximum and will be disappointed quite soon. However, one should not go against the market even if one sees the situation differently. Market maybe absolutely wrong and still go in the same direction. Timing is the key. One has to wait for bulls or bears to lose steam before one can see a turnaround in prices.
Now, since market has become one sided and everyone is short Yen it will be more and more difficult for BOJ to convince investing community to short Yen even more and keep it at even lower levels than it is now. I still keep to a position that after Christmas we may see Yen going even lower and reaching 115.00 in eur/jpy (that is 200 simple moving average on a weekly chart). 

From technical perspective we see a lot of congestion in that area. Of course, this is simply past price action and it may not be stopping point at all, but we still should keep the area (115.00) in mind as that is the level where price stalled a lot of times in 2010. And if we see some change in the tone of BOJ or Japanese politicians we may see a sudden shift in the trend. It is difficult imagine how unwinding of short Yen positions can cause the currency to advance. European currencies may fall like a rock against the Yen in case the scenario comes true. I saw it dozens of times. When bullish positions are closed and bearish opened you can see a rise in Yen of 1000 pips in a matter of a week and sometimes even faster. 

Ok, the drop may not be that dramatic. It may not be dramatic at all! However, from now on I am going to watch and see whether the sentiment of the market is going to change or not. Now, the change may come not because Japanese officials say something, but because European Bank members make some bearish remarks about Euro or Ben declares something dovish. 

For the time being, one may try some small buys in eur/jpy, gbp/jpy on dips, but I would not hold a big position against Japanese Yen. My target for gbp/jpy is 140.00 level. 

Ok. I hope you benefited from the post. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day. 


Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.