Investors who drove the yen to its lowest level since 1998 last week may be about to take a break. One measure of the currency's strength is sending its strongest signal in 13 years that the decline will pause in coming weeks.
The relative strength index attempts to identify possible turning points in the currency's price by calculating the degree its daily losses outpace its daily gains, or vice versa. Not since 1988 has the index flashed warnings as strong as this week's that the Japanese currency was set to reverse course.
The yen has lost 7 percent of its value against the dollar this quarter, and gained on just one day this month, Dec. 5. On Friday, it fell to a three-year low of ?129.61 to the dollar from ?128.66 Thursday, after its longest string of daily losses in four years.
The RSI index suggests the worst may be over for now, though an unsuccessful attempt Saturday to detonate a plastic explosive aboard an American Airlines flight from Paris to Miami could lend further support to the dollar if doubts about flight security measures induce investors to seek the perceived safe haven of the US currency.
The RSI figure, based on prices before the attempted bombing, "suggests that at some stage we're going to have a pullback that could take the yen to the 126 or 127 levels in the next week or so," said Shane Enright, a technical currencies analyst at CIBC World Markets in Toronto. "I'd be a buyer of yen near these levels, and between 130 and 130.50 over the next few sessions." The yen's declines in recent weeks have pushed the exchange rate's reading on the relative strength index to 15.09, an extreme not touched since July 1988. A drop below 30 or a rise above 70 on the index, which runs from zero to 100, suggests a move in the currency is poised to reverse. In dollar terms the index is at 85.45.
Declines in the yen accelerated in the past seven days as Japanese officials suggested the currency was too strong for an economy languishing in its third recession in a decade. It's the magnitude of the move rather than the trend that has technical analysts -- who try to predict moves based on price patterns and other statistical measures -- forecasting a breather.
"Directionally this move is right, but it got a little bit ahead of itself," said CIBC's Enright, who expects the yen will resume its slide in mid-January to as weak as 135 per dollar.
Meantime, "a lot of momentum indicators are definitely overdone" for this part of the move, he said.
Using another tool of technical analysis, the Elliott wave theory, the yen's decline is also poised to stall. Devised by accountant Ralph Nelson Elliott in the 1930s and 1940s, the system is based on the view that patterns in nature recur. It holds that asset prices move in a sequence of five waves in one direction, then shift into a three-wave pattern going against the trend.
"We seem to be in the final stages of the third wave and we could see the yen come back as low as 127 again before pushing back to 132 or 133," said Robin Wilkin, a technical strategist at J.P. Morgan Securities Ltd in London. The yen may weaken to 137 by the second quarter of next year, he said.
Friday's low for Japan's currency also points to a likely level for a turnaround, analysts said. The currency's drop stopped shy of the 129.90 per-dollar level, which marks a 61.8 percent retreat from its climb since hitting an August 1998 low of 147.66.
RSS