By: Dr. Mike Campbell
Technical forex trading is all about looking for trends in the data (usually with short time bases of minutes to hours) with the aid of a large toolbox of computer models and algorithms which will let a trader predict the near term future with a high enough degree of certainty that a particular position can be taken (of course, sceptics call this guessing!). What is abundantly clear from a quick glance at an historical graph showing how the USD:JPY has closed on a daily basis over a three month window, is that the Dollar is appreciating against the Yen.
The Dollar started the month of February worth ¥76.1112; it closed last night at ¥79.7005 a gain of 4.7% - and it has broken through the ¥80 barrier today (it stands at 80.1950 right now). This will be good news for the Japanese since it means that their exports have just become more attractive in importing markets. However, it is not clear just why this depreciation is happening. In the past, the Bank of Japan has intervened in the markets by making large Dollar purchases. These moves have led to substantial Dollar gains, but history shows that they have been of limited effect with the Dollar sinking back to below the starting point over the course of just a few weeks.
Switzerland has also “suffered” from its role as a safe haven currency; particularly with respect to the Euro (and other EU currencies) which is problematic since the EU is the nation’s largest trading partner accounting for 59% of exports and 75% of imports. The Swiss Reserve Bank drew a line in the sand setting EUR:CHF at 1.20 in September 2011 and has managed to maintain the currency at or above this level ever since. It would seem that Central Banks do have tricks up their sleeves to move the markets – at least in the short term.
It is unlikely that the Dollar will regain the heady exchange rates seen against the Yen in the early 1970s, following the Nixon shock when a Greenback would buy you ¥375.41, but in view of the significant challenges facing Japan, perhaps the Dollar has reached its low tide mark against the Yen and the tide has now turned.