The Yen has provided some pretty amazing trading opportunities over the past few weeks as Japan battles the ongoing problems caused by the March earthquake and recent aftershocks.
The earthquake occurred on March 11, 2011 and the markets responded by selling the US Dollar and buying the Japanese Yen (the code to look at is FXUSJY in ProfitSource), as shown in Chart 1 below.
click to enlarge
The US Dollar had been rising against the Yen early in the day on March 11, 2011 however the sell off began immediately after the earthquake struck. The logic here is that the Japanese government, businesses and people will need Yen to pay for the rebuilding after the earthquake, so they are selling foreign assets and repatriating their money into Yen.
This should strengthen the Yen in the medium to long term, as the money flows into that currency.
However, the US Dollar ran down for only four days after the earthquake before rising heavily. Where we had a 600 point fall, we have now had an 800 point rise – wiping out the fall and even finishing stronger against the Yen than it was before the earthquake.
Could everyone have transferred their assets back into Yen in four days, amidst all the chaos and devastation? Almost certainly not, meaning at some stage, this sell off will likely resume.
The 800 point rise brings us to the April 7 top. However, Safety in the Market students would not be surprised to see the current pullback from the April 7 top, as it came at the end of a 100% repeat on the daily swing chart, as shown in Chart 2 below.
click to enlarge
It had also run almost 200% of the previous monthly upswing. This told us to watch out for a pullback (which at time of writing, April 13, 2011 looks to have begun), however it also tells us that there is strength to the upside and that we may well see higher prices in the short to medium term.
Students who have Safety in the Market’s Ultimate Gann Course would do well to study the lesson on “Time Trend Analysis” on this market, to see what the Time Ranges are telling you about this setup. Remember that WD Gann emphasised the importance of 50% levels.
Over the medium term, I believe we will see a much more sustained rise in the Yen as the damage from the earthquake is assessed and the rebuilding process picks up pace. Couple this with the challenges the economic challenges the US Dollar faces and there is potential for some significant falls in the US Dollar against the Japanese Yen over the medium to long term.
For now though, I can see the US Dollar making a rally from these levels, up to 89 and even as high as 96. Even if it rises above 100 Yen again (a long way off from these levels) I don’t expect it to stay that high for very long.
If this current pullback fails to gain any momentum, we could see it end as early as next week.