Tue, Dec 25, 2001 page19

• Following sharp fall, Japanese yen set to hold ground

  • BLOOMBERG
  • • 
    • 
    • 

  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.

  These so-called Fibonacci retracement levels, derived from a sequence discovered by a 13th century mathematician, are widely watched and regarded as significant by traders who base moves on historical analysis.

  "This might be a place for at least a temporary cessation of these gains" in the dollar against the yen, said Andrew Chaveriat, a technical strategist at BNP Paribas. "The market may run out of steam and we might very well stall here at the long-term Fibonacci level." The relative strength index has hovered above the 70 level since Dec. 7, while the yen continued to slide by 3.9 percent.

  That's a reason traders should be cautious about timing their bets around technical signals, some analysts said.

  "If you followed this indicator you would have been shredded all the way down," losing money while waiting for the yen to rebound, said David Solin, a partner at Foreign Exchange Analytics in Essex, Connecticut. While "technically you can find reasons that this might suggest a logical place to turn around very sharply, there's still some momentum and you'd be foolish" to bet against it, he said.

  Zembei Mizoguchi, director-general of the Japan's Ministry of Finance's international bureau, said the currency's decline was justified given the weak state of the economy, which the government said fell into recession in November last year.

  Some officials have advocated a weaker currency, which could boost the economy by increasing exporters' overseas earnings and making Japanese products more competitive abroad. Interest rates have been near zero percent since March and the government's debt load is estimated at 130 percent of gross domestic product, limiting other means of boosting the economy.

  "Japan's economy is in terrible, terrible shape and it's getting worse," said Solin. "The risk is very high" that the yen will slump further before a pause, he said.
• Most Popular

  • 1

    New Taipei building collapses near construction site in Sanchong

  • 2

    What! Dad made a fortune selling English in Taiwan?

  • 3

    Taiwan launches ‘digital nomad’ visa

  • 4

    More than 120,000 green iguanas to be culled this year

  • 5

    Dell picks AMD for business PCs