A Rising Yen Could Be on the Horizon

When you're trying to assess the near-term outlook for a currency, three considerations are often critical: market positioning, volatility and technicals. Macroeconomic fundamentals are important, of course, but their impact tends to be felt over a longer-term period. Moreover, the way the market responds to the fundamental news is itself often a function of positioning and market conditions.

Positioning

According to the weekly Commitment of Traders report, speculators have built a substantial long dollar position in recent weeks. This includes a significant short yen position. Indeed, on a net basis, the speculative community is as short the yen in the futures market as it has been in a year. This net position reflects among the largest short positions they have carried and among the smallest long positions.

This positioning is important in light of the market's failure to rebuild the dollar's upside momentum in recent days. The dollar's recent peak was set on the last day in May near 108.85 yen, and it fell to a low of about 106.50 yen this past Tuesday, June 7.

Possible Double Top?

In the somewhat larger picture, it is possible that the dollar is tracing out a double-top pattern against the yen. The dollar's high in April was recorded near 108.80 yen, and the high at the end of May, as we already noted, was about 108.85 yen. Between those two peaks, the dollar fell to a low near 104.20 yen. The measuring objective of the double-top would be near 100 yen.

It is premature, though, to position as if it were a double top, because such a pattern would not be confirmed until that low was violated. It may more prudent to think of the dollar-yen as a range-bound pair with the double high representing the upper end of the range and the 104.20 area representing the lower end of the range.

The rule of alternation, which states simply that in a trading range, after one side is tested, the next move is to the other side of the range, suggests that a move back toward the 104.20 yen area is the most likely scenario.

---

Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years. He has worked at economic consulting firms and at global investment banks. Most recently, Marc was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. In September 2004, Chandler started a financial consulting firm, Terra K Partners, LLC. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.