"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

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Wednesday, November 19, 2014

Japanese Yen Fall Delights Abe Government in Japan

It is no secret that the Japanese leaders have been wanting a weaker yen. All of their policies, both at the fiscal and monetary level, have been designed to weaken the currency as part of their efforts to pull the nation out of its decades long deflationary funk.

We can get into the various reasons for their woes but this is not the place nor the time for that now. What I do want to look at however is the success that they are having in driving their currency lower.

One look at this chart pretty much says it all. KERPLUNK!

I wish to point out something that occurred last December (2013). The yen broke down below the support level that had formed off the spike low made in May. It looked as if it was getting ready to put in another leg lower but that breach of important support turned out to be a head fake for the bears.

I remember trading it at that time. What was taking place was big swings between "RISK ON" and "RISK OFF" trades. During the risk off trades, the Yen would experience sharp rallies as the highly leverage carry trades would get rapidly unwound with traders covering short yen positions in a very large way. That would squeeze the currency higher. As the fears/concerns that led to the rally subsided, the short selling would begin anew and back down the currency would go. A new set of worries would then see a repeat of the rally and back and forth we went.

The takeaway from all that however was the fact that when we got that initial breach of downside support in December, we DID NOT get a secondary lower close to confirm that breach.

However, look at what happened in August and September of this year. In August the yen once again violated that support zone. This time around, the following month, the market confirmed the breakout by posting a sharply lower close ( the second close below the broken support zone). The rest, as they say, is history.

The Yen has essentially imploded lower as it does the bidding of its monetary masters in Japan who have greenlighted speculators to beat it senseless for them.

Having been on the wrong side of the Bank of Japan on more than one occasion in my currency trading career, I can tell you it is definitely not much fun. When one does find favor in their eyes, it is an entirely different matter.

I have noted some areas on the chart where the currency might be able to find some support. Notice there still seems to be a great deal of air below this market. Keep in mind that any sort of scare that surfaces to trouble investors, will see sharp countertrend rallies in the Yen as the carry trade gets temporarily unwound.

One other point to make about this - there are still gold perma bulls who send me one negative story after another ( or so they think) in regards to the US Dollar and its soon to be imminent demise ( in their mind). For some odd reason, they seem to forget that the Dollar derives any value it has on the crosses from trading  against other currencies. With the yen falling as hard as it has been, reading their breathless predictions about the upcoming Dollar crash seems a bit surreal to say the least. Apparently, they are not looking at this chart.

the last point - notice how the downside "head fake" that I noted on the chart was followed by a seven month or so period of price consolation prior to the next strong leg lower. Until we got that second close below the support level, the yen refused to break lower. In watching what has been happening with gold, it strikes me that we are perhaps seeing something similar.

The recent breach of support at $1180 looked pretty ominous as it was a triple bottom. However, the market has thus far refused to CONFIRM that downside breach by posting solid consecutive closes BELOW the level. It has spiked lower but has popped back up the last two weeks.

I wonder if we might be seeing something similar occurring in gold that we saw in the Yen? If we are, we will get the confirmation by a strong close below $1180 followed by more downside weakness on the weekly chart (( note that this is a weekly chart of gold and not a monthly like I used for the Yen)).

If not, gold should move higher and first take out that resistance zone noted the chart near $1240-$1260. We shall see shall we not?


  1. Why did gold just instantly drop $20? I didn't see any news this morning to justify it

    1. Gilliom;

      Wire services reporting "NO" on Swiss Vote referendum leading in polls. That is a shift from last week. Swiss vote has been propping up the metal recently, along with currency movements.

    2. Thanks Dan. I didn't know that.

  2. When speaking of a currency, you always have to ask yourself, against what ?

  3. Bass is right. Yen headed much, much lower. And sooner or later, the Nikkei also.

    1. Kyle Bass must be grinning right about now.
      If you're him, at what point do you start getting out of his large short yen trade? Seems early right now but at some point he'll start cashing in part of his position.
      The temptation to..."let it all ride"...or at least most of it, has got to be a little tempting.

      This Japan situation eventually results in a default situation.
      The question I've been asking myself for almost 2 years (after Abe's Nov. '12 loose yen policy dribbled out) was how weak does the yen get before the 3rd largest economy ( was 2nd largest back in 2012) spirals out of control and implodes.

      It'll reverberate throughout the world for sure but to what extent and for how long is anyone's guess.
      And then everyone will move on after the waves from it settle down.
      Like Rico's been saying...these type of defaults happen fairly frequently.

      A perfect example was Russia's default. Now look at them.
      It's almost like it never happened.

    2. This comment has been removed by the author.

    3. ...and I agree with MA on this.


      Public and persistent humiliation of Putin is not a smart/shrewd tactic and it will backfire in the West's face.

      The smug, arrogant approach by the West is a denial that a blunt two-handed shove in the chest from Putin is possible or likely. They should brace themselves for just that.
      That miscalculation by them might just be one for the history books.

      Whereas Hitler was appeased it seems that embarrassing and demonizing Putin is a big mistake. I don't think he wants Europe.

      I do think though that he wants to connect the dots between Crimea to Odessa and Transnistria.
      All the posturing in the east of Ukraine has taken most eyeballs off south Ukraine.
      Making Ukraine landlocked would be a big deal as would Russia controlling the Black Sea.
      It seems likely.

  4. Wow! Great analysis Dan! This is why you're such a legendary trader.

    1. Shaun;

      thanks for the kind words but in all honesty my friend I am just an experienced trader who has learned to stay out of the way of getting my teeth kicked in by these markets. Get beat up enough and you learn that if you want to stop hurting, stop doing what brought on the beating!

      When these markets are as wickedly volatile as they are now, they can do just about anything.

  5. And gold up 20$. I don't want to be chopped by this market. Waiting for 1259 then short

  6. USDJPY closing in on 118 at the moment.

  7. Japan's problems will be severe for the populice. They are 100% dependent on imported oil and gas. That's a nationwide tax hike!
    Hence their desire to restart the nuclear power plants.

    Bad for oil - well a little.
    Good for uranium - some?


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