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The Yen Plunges, Triggers Major Technical Events

The Yen Plunges, Triggers Major Technical Events

2010-03-31 15:53:00
John Kicklighter, Chief Currency Strategist

Market conditions are starting to warp and bend. The correlation across markets that has been drawn by lines of risk appetite and risk aversion has slackened this past week; and today it seems to have diverged even more. Having taken a break from its own, steady advance, equities were carving out another day of congestion. Showing a little more life, commodities jump higher (though they backed off of highs later in the US session). However, the most conflicted market was without doubt currencies. High-yield currencies like the Aussie and Kiwi dollars were both dropping while the Japanese yen plunged. Even more confusing was the drop in the US dollar and rally for the Swiss franc. This is a mixed bag; but from this activity, there have been some incredible technical developments. Yet, just like the initial EURUSD break from congestion last week below 1.3450, these moves could similarly be destined to stall. Once again, we don't have a clear and solid bearing on underlying sentiment. What's more, the conflict amongst the various currencies and asset classes mean that even if there is a trend to borne from all of this, half of these developments will be reversed while the other half find follow through.

Speculating on which is the half that will develop and which retraces is difficult. If I lean to one side and sentiment itself holds, then both directions could fail. Nonetheless, I maintain an outlook for risk appetite to collapse in the near future; and the headline bull trend in the Dow will mark the symbolic toppling of speculative sentiment. In the meantime, I will approach with caution in positioning. This is the reason the massive neckline break on an inverted head-and-shoulders for EURJPY is tempting me only to set in a reduced size position. What's more, I am holding off from leveraging exposure to other yen-based crosses. For USDJPY, my retracement doesn't seem to be in the cards; but I am waiting for 93 to give before I build in (this is a stand apart setup from the rest given its unique fundamental background). I am keeping away from most other yen crosses; but AUDJPY has drawn my attention. If the January 86.20 swing high give, it would open the door to an open sky. Reconciling such a long-termed forecast for profit taking, this pair does have a yield and economic health bias towards the Aussie dollar; but I would still only look for a small fraction of the full potential. For other positions, I'm holding on to my AUDUSD short until my stop gives or it reverses. And, the EURUSD short I reentered yesterday has been taken off just above breakeven (small loss) given the unusual price action we have seen this week.

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