A Few Good Yen

Christopher Investment Post-Folio 2 Comments

Note: If you are not familiar with currency pairs and FX trading… click the little footnotes.1  Those are my nerdy additions and explanations to this article…


Well, Lauren and I might have just gotten a “bon voyage” present from Japan.  After bouncing around for about six months in a tight range, the USD.JPY currency pair looks to have broken out and the US Dollar is gaining on the Japanese Yen just in time for the Japan portion of our trip:

USD.JPY – Daily (2015-05-26)

USD.JPY Daily (2015-05-26)

For those not familiar with currency charts, for this pair (USD.JPY) the Japanese Yen is the base pair, and so as this chart goes up (i.e. from 100 to 123) that is the US dollar strengthening on the Yen.2

As this daily chart shows, twice before (last December and this March) the Dollar’s rise against the Yen was halted when USD.JPY capped out at 122,3 but the pair has now broken out of that range to close above 123 for the first time in about eight years.  Technical traders love a breakout like this.

Often (but absolutely not always), when a currency is stuck in a range for a long period of time and then breaks out, it will continue in the direction of the breakout.  I cannot stress enough the “not always” part – this is a complicated subject and we’ll be covering a lot of nerdy currency stuff like this here on BackpackInvesting.com.  For now however, by looking at a weekly chart I think I can more easily explain this concept of a breakout and why the trade caught our attention.

USD.JPY Weekly (2015-05-26)

A: After steadily strengthening for years (not on this chart) against a falling dollar, the Yen topped out between 2011 & 2013 in a range between 75 and 85 to the dollar.  When USD.JPY finally broke out at the end of 2012, the pair raced higher!
B: For most of 2013 the USD.JPY was locked in a narrowing range and coiled up into a wedge 4, before breaking out higher at the end of 2013.  But this time it didn’t get very far…
C: For the first half of 2014 the same thing happened – USD.JPY was locked into a narrow range.  When the Yen weakened and USD.JPY broke out higher again in 3Q14, the pair raced from 105 to 120 over a few months.
D: For this latest breakout… the close above the previous 122 resistance was good, but we’ll be watching closely to see if that trend continues.

What’s Next for the Japanese Yen?

There are plenty of times that a currency (or commodity, or stock, etc) will break out of a range, only to fail and go back into the range (or reverse direction completely).5  As this latest breakout for USD.JPY above 122 occurred on a Tuesday, I’d like to see the pair continue higher (i.e. the Dollar strengthening further vs the Yen) for the rest of this week to show some conviction on the part of the “Dollar Bulls.”  It would be a great sign if we go into the weekend at new highs for USD.JPY.6

While we expect the Yen to weaken further as a result of this breakout, we’ll be following this pair closely.  Not only because we want more Yen for our Dollars when I hit the ATM at the Tokyo airport this weekend, but also because we are trading this latest move higher in the Dollar and betting that the Yen continues to weaken by shorting the Yen.7  If this turns out to be a false breakout and the pair closes back below 122, that would probably take us out of the trade.  I’m not really sure what my target is yet to take profits… we’ll need to see if the trade works first.

Thanks for reading,

Disclosure:  Long USD.JPY at the time of writing.

Market commentary and references to specific trades represent the opinion of the author and are not be construed as investment or trading advice and is not meant to be a solicitation or recommendation to buy, sell, or hold any securities mentioned.

  1. Like this one :)

  2. So a dollar now buys you about 123 Yen versus 100 Yen last summer.  By default, these are “pairs” so if the dollar is doing one thing (higher or lower) the Yen has to be going the other way.  If you say “the Dollar strengthened” then you are also saying “the Yen went down” when talking about USD.JPY

  3. Traders call this “resistance” when a mental line of defense forms.  If a stock, currency, etc’s rise is halted at 100, the idea is that the next time it gets back to 100 more sellers will come in because that line held last time and they think it will fail to break 100 again.

  4. Another technical trading chart pattern, cleverly named because it looks like… a wedge.

  5. Traders refer to this as a “false breakout.”

  6. We’ll talk about this in an upcoming post, but if you believe in market psychology, it’s a great sign for currency to close at the very high (or low) of the weekly trading range because it indicates the traders driving the direction (i.e. either the bulls or the bears) have more conviction and are not taking profits going into the weekend because they expect the trend to continue

  7. A “short position” in the Yen means we are betting against the Yen by buying the USD.JPY pair.  So we bought dollars and sold Yen.

Comments 2

  1. DB

    This is good stuff, I just wish my only knowledge of markets/trading comes from watching “Trading Places” repeatedly. Let me know if you ever want to corner the frozen concentrated orange juice market.

    1. Post

      Ha – too funny! I’ve actually never traded OJ futures. Have watched them from time to time and they seem pretty volatile. However if you want to partner up to take on Randolph and Mortimer Duke I”m game :)

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