Yen stages rally but short-term trend remains down
Fundamentals
The Japanese Yen futures have rallied the past few sessions as continued fears about the debt situation in Greece have trader covering previous short positions. Few would say that conditions in the Japanese economy would warrant a strengthening Yen, as the country continues to fight deflationary fears, with the Bank of Japan (BOJ) once again keeping interest rates near zero, with little signs that this policy will change any time soon. This low interest rate policy has made the Yen a favorite borrowing currency for so called "carry trades" with speculators "borrowing" in Yen to make investments in higher yielding currencies or securities. These trades work well when investors are looking to increase their risk in order to gain potentially large percentage returns. However, once traders look to lower their exposure to risk, the unwinding of the "carry trades" tends to sparks a rally in the Yen as traders buy back their short positions in the currency to exit their trades. Among the most popular of these trades was long Euro/short Yen, so the continued uncertainty concerning the Greek debt situation had many traders covering this trade adding support to the Yen. Additional Yen strength may also be coming from increasing expectations that China is preparing to let the Yuan float more freely from the current bands in place. This belief was highlighted from the recent visit to China by U.S. Treasury Secretary Timothy Geithner. Any potential upward revaluation of the Yuan could spill over into other Asian currencies such as the Yen or the Korean Won and it appears that some traders may already be positioning themselves for this outcome. Any meaningful Yen rally would not be welcomed by Japanese exporters who have voiced their concerns to the Japanese Government about the detrimental affects to their industries and profitability should the Yen continue to strengthen. This could set the stage for potential government intervention in the FX markets to help weaken n the Yen, should economic conditions turn for the worse, though it has been several years since the BOJ has used intervention as a "tool" to control the value of the Yen, the potential for intervention is out there which may curtail the extent of any upward correction in the Yen.
Trading Ideas
Traders who believe the recent Japanese Yen rally is nothing more than a short-term correction may wish to investigate the purchase of bear put spreads in the June Yen futures options. An example of this trade is buying the June Yen 1.07 puts and selling the June Yen 1.02 puts. With June Yen futures trading at 1.0748 as of this writing, the spread could be purchased for about 145 ticks or $1,550 per spread not including commissions. The premium paid is the maximum potential loss on the trade with a maximum potential profit of $6,250 minus the premium paid should June Yen futures be trading below 1.0200 at option expiration in June.
Technicals
Looking at the daily continuation chart for Japanese Yen futures we notice the major uptrend in the value of the Yen since the major low made back in June of 2007. Recent trading activity has favored Yen bears, however, as prices have fallen below both the 20 and 200-day moving averages which can be viewed as a bearish signal by both long and short-term trades. However, it would still take a price move below the uptrend line, currently at 1.0250, to really signal a major trend in trend. The recent sell-off below 1.0600 sent the 14-day RSI into oversold levels, which may have triggered some of the short-covering rally attempt we have seen the past few trading sessions. The April 2nd lows at 1.0566 should provide near-term support for the June Yen, with near-term resistance now seen at the 20-day moving average currently near the 1.0860 area.
Mike Zarembski, Senior Commodity Analyst
