JAPANESE YEN TESTS MAJOR RESISTANCE -- WHY THE SWISS FRANC IS DOING SO WELL -- THE MARKET'S MOVING AVERAGE TRENDS ARE STILL DOWN
YEN IS AT CRITICAL CHART POINT... Last Friday I wrote a bullish story on the Japanese yen, which has gone from the world's weakest currency to the strongest since last July. I explained that the yen was benefiting from the unwinding of the "carry trade" in which global traders buy back their yen shorts and sell global assets elsewhere. I also expressed the view that the rising yen is bad for global stocks. I showed the yen/dollar forming a bullish-looking ascending triangle over the last decade. I'm showing it again today because the yen is now very close to challenging the top of that formation. Today's trading high at 97.72 is less than a point from its late-2004 peak at 98.09 (Chart 1). A close above that important chart barrier would put the Japanese currency at the highest level in eight years. Its early 2000 high was at 99. That makes the 98-99 a critical zone to watch in the days ahead. A decisive close over that area would be a very bullish development for the yen. What the yen does in that critical chart zone may also have some bearing on the direction of global stock markets and especially Japan. While a rising yen has been negative for global stocks, it's been especially bad for Japanese stocks.
Chart 1
WHY THE SWISS FRANC?... In that same message, I mentioned that the Swiss franc was also benefiting from the unwinding of the carry trade. One of our readers asked why. I asked some currency traders and this is what they told me. The Swiss franc is considered a low-yielding currency. As a result, it didn't benefit from the flight out of the yen into other higher-yielding currencies. In addition, the SF has historically been considered a safe haven in times of financial turmoil. Here's the recent track record. From the start of 2005 to the middle of 2007, the only two foreign currencies that lost ground were the yen (-15%) and the Swiss franc (-4%). By contrast, big gains were seen in the Canadian Dollar (+16%), the Aussie Dollar (+12%), the British pound (+5%), and the Euro (+2%). Chart 2 shows those roles reversed since July 2007. The yen has been the strongest currency since then (+19.8%) with the Swiss franc right behind it (+19.2%). The real surge into the S. franc and the yen started during November. That can be seen in Chart 3 which plots two high-yielding currencies (the Australian and Canadian Dollars) relative to the Swiss Franc (flat black line). The relative strength ratios of those two currencies have been dropping since November (against both the franc and the yen). Not by accident, that was the same month that global stocks peaked as shown by the falling Dow Jones Global Stock Index (green line). The Swiss Franc is now trading at a record high versus the dollar (Chart 4). The symbol for the Currency Shares Swiss Franc is FXF. I'm not suggesting that the Swiss franc is a good buy at these high levels. But it might be worth tracking as a contrary indicator for global stocks.
Chart 2
Chart 3
Chart 4
MARKET TREND IS STILL DOWN ... When all is said and done, it's usually a good idea to try to keep things simple. So let's do that with a couple of moving average lines. One of the advantages of moving average lines is that provide precise buy and sell signals. Moving average crossovers are especially useful for timing purposes. One of my favorite combinations is the 13- and 34- period EMAs that I've written about several times before. Charts 5 and 6 show the daily and weekly combinations. And they're still in downtrends. Chart 5 shows that the daily lines turned negative at the start of November and are still negative. The fact that the two daily lines are starting to diverge once again suggests that short-term downside pressure is intensifying. The weekly m.a. lines in Chart 6 turned negative during December and are still negative. I reported at the time that the December weekly sell signal was the first in five years. The solid line below Chart 6 plots the difference between the two weekly lines. The fact that the line is dropping means that the 13-week EMA is still falling faster than the 34-week EMA. That means that the market's main momentum is still to the downside. In today's trading, the S&P fell 10 points to close at a new monthly low. A test of the February intra-day low at 1270 appears likely. A close below that line (which appears likely) would put the S&P at a new eighteen month low. Assuming that happens, my next downside target remains a test of the summer 2006 low near 1225 (see Chart 6). The S&P is now down 17% from its October high. A drop to 1225 would put it 22% off its high and in bear market territory.
Chart 5
Chart 6
