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?