The Bank of Japan was very successful at the end of 2012 and early 2013 at pushing the value of the Yen lower. Like most developed-country central banks, the BoJ is did this in an attempt to stimulate the stagnate economy. This was when we saw the ‘hedged’ Japanese stock ETFs do so well and attract lots of buyers.
For a while, the efforts worked in the sense that asset prices went up — including Japanese stocks. However, without growth the effect is fleeting and things have flattened out again. The BoJ got more bad news last week when the European Central Bank cut one of its key rates to near-zero.
The problem is that central banks have to fight each other to the bottom, and when one cuts rates it can raise the relative value of foreign currencies. This is counter to the goals of the BoJ who has been reluctant to take further measures despite the devastation to the Japanese economy from April’s sales tax hike.
There seemed to be some hope for a weaker yen when Prime Minister Abe recently unleashed his so-called “third arrow” of economic reforms (aka “Abenomics”) but these reforms are unlikely to change things for the yen in the short term. Long-term effects are also uncertain, but this all might present an opportunity for short-term investors monitoring this frustrating channel on the JPY/USD exchange rate.
The CurrencyShares Japanese Yen Trust (FXY) buys the yen with dollars so it shadows the yen futures contract. Like the futures and spot market, the FXY has been channeling in an incredibly tight range (see chart) since February. However, within that range, a pattern has been developing that looks like a potential inverted head-and-shoulders continuation. Its still too early to call it completed but if support at $95 holds, it becomes much more likely. This is the same pattern the SPDR S&P 500 ETF (SPY) formed in March through May before its own breakout last month.
An inverted head-and-shoulders pattern is usually symmetrical with one or two shoulders on either side of the head and a declining volume trend through the pattern. Volume starts to pick up on the last right-hand shoulder before the breakout and that could be happening now.
This is definitely a pattern to watch that could send prices back up to $100 in the short-term before the BoJ can act to stop it.
John Jagerson and Wade Hansen are the editors of SlingShot Trader, helping investors capture options profits trading the news by using a proprietary 100% news-driven trading platform that turns event-driven pricing inefficiencies into fast profits. Get in on the next trade and get 1 free month today. New to options and need more personal guidance — try our online options course: Strategic Investing and receive your first two weeks free by clicking here.