Time to Short the Yen...?

Or is this a bull market you don't want to get in front of?

The Japanese Yen has been in a major bull for the last 3 years and has had a few cycles within this trend but the major longterm trend for the YEN is up. It has gone from 85.0 in October of 2008 to 119 as of today. That is a 40% gain in this 3 year trend. An important factor in identifying changes in trends is to know what fundamentals are driving the price and to identify if those fundamentals are still in place to drive the price higher or if there has been a material change.

Now there are four basic factors that drive currencies: yield differential, relative economic growth, current account deficit/surplases, and relative inflation. Certainly investors aren't buying the YEN for the first 2 reasons. One reason explained for the limited selling of the YEN is that the majority of Japanese debt is held by its own citizens, thereby limiting the selling of the YEN, but certainly is not a factor in the recent buying of the YEN to its recent highs. So that leaves inflation.

Considering that the Japanese are one of the few that aren't rapidly debasing their currency, and on top of that deflation in Japan that could be as high as 2.5%... this seems to be the major factor. In a sense the the 2 safe haven currencies are the YEN and GOLD. So if I think Gold is going higher but looking for a top in the YEN... WHY?

B/c with increasingly higher YEN prices, Japanese companies are at an even greater competitive disadvantage to their Asian counterparts that are tied to the USD. At some point there will be a breaking point where authorities will have to intervene to reduce the YEN prices. An increasingly popular view in Japan is to start creating $$$ to reduce the price and since the Japanese would rather be in control of their own economy and not adjust to a speculative high priced YEN that in a normal world prices would not support, I would suggest that at some point in the future the Japanese will join the global currency debasement party.

And as more countries turn to printing money as a tool for various economic reasons, it will just push gold higher. And until developed nations stop debasing their currencies on a massive scale, I remain a solid gold bull.

At 120.00 the YEN looks exhausted, it may not be the end of the rise in the YEN, but it looks like a great trade for short term momentum to the downside to the 20MA.

Happy Trading