Friday, August 6, 2010

Carry On Yen...

If anyone had dealt in currencies between '85-95, one would have developed a huge respect for Yen; Against Dollar it moved up from 260 to 80, certainly a very large move. What made it more interesting was the fact it also outperformed other strong currencies such as DM & Stg.

For the next 13 years, it moved in a large range between 80 and 160, with the "carry trade" recommendations peaking in 2007. Since then, it seemed to have resumed its upward journey riding on a risk-aversion tag. And in these two years, atleast I haven't heard the words "Yen carry" from any Fx sales desks.

What strikes me is (a) near consensus on "stay-away-from-Yen-carry" and (b) the timing of 2 years coming out of a large triangle that looks like a major 4. Could this be the last leg of a rally for Yen. Take a look at this long term chart:


The impulse conditions of the entire rally (of Yen) seem to be in place. The "3" has extended and sub-divided; The 2 & 4 seem to have alteration both in extension and the primary degree. The 5th has so far equalled 1st in % price and in time and since 3 extended, has a good chance to fail? The initial move off the 4th ending seems impulsive enough and unless we are in some kind of running correction, we could be headed for a terminal impulse or a diametric.  

What could be the arguments against this scenario? The 4 correction is lesser than 2 in %price terms. Also traditionally, the targets out of major triangles should equal the width of the triangle? So a level of 40-50 Yen to a Dollar is not an out of place target. 

The last Yen rally would have taken out literally all the carry trade against it. With Euro/USD/Stg short end interest rates being so low, there are other strong contenders for carrying on. So with no particular carry benefit, why should yen be shorted? The answer may be in the potential economic prospects of the West particularly U.S., which do not look very promising and such currencies should do well in deflationary conditions, right?  

On balance I feel that there is a good chance of a potential 5th failure of Dollar-Yen around 80. Invalidation is if we get another "impulse" down and take out the all time lows (on monthly closing basis may be..!). If this is indeed a reversal, we should get a very decent up move for Dollar considering the size of its previous down move    

Update, August 11,2010: I sent this to get the views of couple of neo-wave specialists, who I respect very much. DG suggested a neutral triangle while Vipul suggested a double combination. What is interesting is both felt that the LT pattern is near a completion phase. And it could either provide a decent reversal (DG) or go into a long sideways consolidation (Vipul)

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