The strong bounce in the last couple weeks seems to strongly support the continuance of the medium-term upward trend in the dollar-yen ratio. In mid-December, the dollar touched its low point against the yen below 88. It has spent the last 3 ½ weeks making a healthy and consistent climb with gains near 12 pips.
Broadening out a bit on the charts, the dollar still has some work to do for any significantly higher moves up against the yen. On a 2-year chart, the dollar would need to break several points over 100 yen before it could attempt a breakout and potential reversal of the longer-term downward trend that began about a year and a half ago.
The dollar peaked above 125 yen during the middle of the summer time in 2007. This was also the height of the stock market Bull Run when it surpassed 14,000 points. As the share prices were rising, the dollar-yen ratio was still part of the ongoing carry trade that pitted higher interest yield currencies against the then-zero per cent interest yielding yen. Just as stocks unwound quickly, the dollar fell hard during the months of carry trade unwinding.
The carry trade is a way for investors to take advantage of the ability to earn daily rollover interest from carrying higher yield currencies by borrowing with lower rate currencies. This practice is popular during stable economic climates and the global crisis started a massive carry trade unwind, which led to sharp reversals in many pairings with the yen.
Now that the dollar has a zero per cent interest basis, it is on a relatively equal speculative playing field with the yen. Speculation has been more centered on the economic troubles faced in the US and Japan. As hard as times have been for Americans, the Japanese economy is also suffering through one of its worst stretches ever. Japan’s gross domestic product has been experiencing contraction at rates as historic, or more so, than US declines. Based on currency speculation, it appears many traders believe the US economy has the potential for a turnaround in shorter order.
For now, the dollar looks to clear a hurdle that it hasn’t been over in around four months. The 100 yen point would be a significant psychological clearance for the dollar. If it is able to make a move past the century mark and hold, the upward trend in the dollar-yen could continue.
10:08 PM EST
Tuesday, March 31, 2009
Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University. He is also in house stock market commentator at Live Charts UK, where you can find real time charts.
Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.