Abeconomics, Yen and the Fibonacci series

by George Hatjoullis

Montly Dollar yen

A comment by the Japanese economy minister, Akira Amari, has elicited some Yen buying ( http://bloom.bg/10fAPuC). Not very much buying in the great scheme of things but it does serve to illustrate some interesting aspects of market dynamics and the very loose connection between policy and markets.

The first thing to always consider is what he actually said and not what the sound bite from the news agency implied that he said. Was something lost in translation? What was the context? Bloomberg report his comment thus:

It’s being said excessive yen gains have been corrected a lot,” Amari said on the public broadcaster NHK yesterday. “If the yen extends losses a lot, people’s lives will be negatively affected. It’s our job to minimize that.”

The yen gains have been corrected to some extent. Whether it is a ‘ a lot’ rather begs question of compared to what? If the yen weakens further some people’s lives will be affected negatively. This is true and others will be affected positively. Now here comes the interesting part; ‘It is our job to minimise that’. Does this mean to minimise further weakness in the yen or to minimise the negative affects on people of further yen weakness. The FX market naturally opted for the former interpretation and sold yen.

FX traders always remind me of sparrows. They take flight at the slightest noise but always return to the source of the bread crumbs. The result is you always get a second chance to buy or sell FX if you want to do so. The FX market is noisy but trends are usually clear and long-lasting. The trends do, however, correct just like any price trend and this should not be ignored.

First, to deal with the Amari comment, whatever he really meant is largely irrelevant. If monetary policy is to double the money supply in two years then the currency outcome is not in the hands of the policy makers. Further yen weakness is inevitable. Indeed it is implicitly desired. The purpose of the monetary expansion is to boost inflation expectations. Yen weakness will be most useful in this respect. The negative effect is the rise in bond yields that ought to result. I have dealt with this in previous blogs.

Second, it is worth asking how far the yen might weaken and what kind of correction might the path experience. For this i refer you to the above chart and the Fibonacci series. Chart analysis is anathema to economists and finance academics as it seems to contradict the efficient markets hypothesis. Whatever!

Chart analysis is widely used by traders and the Fibonacci series features prominently is this analysis. The above chart indicates the Fibonacci-derived retracement levels for dollar yen for a monthly chart. The 50% retracement was approximately 100 (it is sensitive to small variations in line drawing) and the 61.8 % retracement is approximately 105.5. The ascent of dollar yen has been swift and steep and this has pushed it into ‘overbought’ territory. Dollar yen breached important resistance at around 101.50 and has further resistance at around 108 from the declining trend of peaks.

As this is a monthly chart much depends on where we close on 31 May. The most likely pattern now however is for dollar yen to trade between 100 and 105.50 for a month or so. A close above 105.50 would suggest a good chance of a move up to the May 2007 high of around 124. A close below 100 would open up more negative possibilities.

Speak to different Chartists and they will read the runes in different ways. I am not a Chartist but do acknowledge that charts contain information. Used in conjunction with all other information they can be helpful. So what do we know? The BoJ is aiming for a very rapid doubling of the money supply. This is aggressive and quite consistent with a dollar yen move to 124. Dollar yen has moved some way quickly and may be due a pause. However, this pause could merely amount to a sideways move within a 100 to 105.50 range. Conclusion? Buy 100 and sell 105.50 until the range breaks. Simples!