I got a call from a friend last week. She asked me about the yen and what I thought. I don’t look at currencies too often as they are pretty illiquid and minimally available in the securities market where client brokerage accounts are held. Additionally, no one will become rich investing in currencies in brokerage accounts so I tend to focus investment attention on stocks, bonds, some commodities and hard assets. Trading currencies is best done via FOREX markets because of the leverage they bring.

Being the natural skeptic I am, my immediate thought when she mentioned it was the yen, really? The dollar is so strong (right now) and the yen so weak there is no way! I pulled up a chart and was pleasantly shocked at what I saw because she was right. As you see in the chart below the yen has been basing for more than a year and has formed an inverse head and shoulders reversal pattern. Last week’s close was just above the neckline and what I would consider as a decent entry point upon confirmation. Add to that it has created higher highs and higher lows while price has risen above a flattened 200 day moving average which looks like it is now starting to curl up. These are all positive and things I need to see before I consider investing in something that has been in as severe a decline as the yen has. I do have my biases and would consider this a “trade” and not investment. I say this because fundamentally I don’t see a rising yen lasting as the Japanese government and central bank are doing everything possible to weaken it and until that changes I think it is doomed long term. For clarity, the difference between a trade and an investment is the time frame. A trade will be shorter in time, likely be a year or less probably months (they have even been as short as a few weeks) and an investment, longer. I prefer to avoid “trades” and hold out for “investments” in client accounts whenever possible.

As you know I try to not spend a whole lot of time on why an investment is doing what it is doing but in this case I am going to as there is a valuable lesson to learn and keep in mind. With the fundamental backdrop being so negative for the yen one has to wonder why it would be moving in the opposite direction it should be. Historically the yen is considered a safe haven (much like the dollar) during times of (stock) market stress and it appears that Mrs. Market is once again remembering that correlation

Because the yen and stocks move in opposite directions, I would expect this yen rally to have some legs as I don’t think we are anywhere close to being done with the stock market decline. But once we are, I think this trade will likely have run its course.