It has been several years since I last posted a chart of the Euro-Yen currency cross. Quite frankly, there has been no reason to monitor it in my opinion, not with the ongoing crisis that had engulfed the Euro Zone through most of this now fading year. However, with the strong move lower in the Yen of late, I have been examining this cross once again to see if it can provide us with any signals of upcoming events.
You will note its collapse back in 2008 - this was the year in which the big Japanese Yen Carry Trade was unwound as nearly every hedge fund on the planet was taking part in tthat particular trade. When it was time to unwind it during the panic, there was literally no one on the other side of all those trades involving the Carrry.
During that Carry trade season, as this currency cross moved higher, the price of commodities in general tended to track right along with it. Gold in particular was strongly influenced by this cross. As it moved higher, indicating the presence of a strong appetite for RISK, gold moved right along with it to the upside.
If, and this is a big IF, we begin to see this appetite return ( and remember, it first occured because hedge funds were looking for a way to obtain yield in a strongly low interest rate environment - Sounds familiar doesn't it?), then this cross should continue to move to the upside.
The chart shows a picture of a market that looks as if it is very close to ending the 4 year downtrend. If this cross can end this month of December above the 25% Fibonacci Retracement level shown on the chart, then I think we can begin to say with a great deal more confidence that the risk trades are going to return in a much larger way in 2013. I would be about 99% convinced of that if the cross does indeed move up past the 38.2% retracement level.
If this move is for real, and this cross continues higher, it should indicate that any deflation fears are behind the market and that the Central Banks have won their war against it ( at least for the time being). The cost of that victory however will be a repeat of what we saw leading up to the credit crisis of 2008 - namely, soaring commodity prices driven higher by huge speculative inflows from cash rich hedge funds chasing yield. Who among us can forget $150 crude oil back then?
Either way, gold will benefit strongly, and silver will as well, if this is becomes the trade of 2013.
Time will tell. As I like to say, The Central Banks had better be careful of what they wish for - they are liable to get it and more!
"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat
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