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Yen Elliott Wave Shows ‘Final Surge’ to 72 Per Dollar, MUFG Says

The yen will rally to a new record at about 72 per dollar next year as the currency’s 40-year rising trend comes to an end, Mitsubishi UFJ Morgan Stanley Securities Co. said, citing trading patterns.

Japan’s currency is in the final stage of an advance that started when the nation ended the yen’s peg against the dollar in 1973, said Naohiko Miyata, chief technical analyst at the unit of Japan’s largest banking group. The forecast is based on analysis developed by accountant Ralph Nelson Elliott during the Great Depression called the Elliott Wave, which says market swings follow a predictable five-stage structure.

“The yen will record its final surge versus the dollar around the first half of next year,” Miyata said.

The yen’s upward trend remains intact, even though the dollar will temporarily rebound early next year toward 89 yen or 85.93 yen, the level reached after Japan intervened in currency markets on Sept. 15, Miyata said. The dollar slid against the yen in the first, third and fifth Elliott Waves, and underwent correction in the second and fourth, he said.

The yen strengthened to 80.22 versus the dollar on Nov. 1, the highest since April 19, 1995, when the currency reached a record high of 79.75. The yen traded at 81.19 per dollar as of 1:11 p.m. in Tokyo.

Fifth Wave

The first wave began as Japan ended the yen’s peg following the so-called Nixon Shock in 1971, when then-U.S. President Richard Nixon’s administration suspended the gold standard for the dollar, Miyata said. The initial wave pushed the yen to as high as 175.5 per dollar in October 1978 before the second wave weakened the yen to 278.50 in October 1982, he said.

The third wave ended when the yen gained to a record 79.75 in April 1995, according to Miyata. The 12-year fourth wave, where a “triangle formation” appeared, finished when the yen hit a low of 124.16 yen in June 2007, he said. A triangle pattern is formed when upper and lower trend lines intersect.

The ongoing fifth wave will likely end in the second quarter of 2011, based on the theory that the dollar bottoms out at an average cycle of about 64 months, Miyata said. The last stage could also end in October next year, based on the assumption that it will take 198 months for the fourth and fifth waves to finish, the same number of months it took for the second and third waves to complete, according to Miyata.

The dollar dropped about 50 percent during the first wave and declined from an April 1990 high of 160.35 yen to a record low of 79.75 yen, Miyata said. The currency may target 75 yen, which is about 50 percent below the August 1998 high of 147.63 yen or 72 yen, one-fifth of 360 yen, according to Miyata.

“In the past, 180 yen and 120 yen -- submultiples of 360 yen -- were seen as key levels,” Miyata said. The dollar’s record low of 79.75 yen is an “overshoot” of 90 yen, which is a quarter of 360 yen, he said.

Yen’s Gradual Slide

After the yen’s 40-year rally ends next year, the currency will begin a long-term decline against the dollar, Miyata said. The yen may target 124 per dollar, the level reached when the triangle pattern was completed in the fourth wave, he said.

Still, since the yen weakened to as low as 147 per dollar during the triangle formation, “about 150 may come into sight” around 2015 to 2016, he said.

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