Yen May Weaken 10% on Ichimoku Cloud Breach: Technical Analysis

The yen may depreciate as much as 10 percent against the dollar if it closes weaker than its 21-month moving average after ending last week above a dollar-yen cloud level, according to Barclays Plc.

The Japanese currency, which strengthened 21 percent against the dollar in 2010 and 2011, may be reversing that trend as it has depreciated 5.3 percent this month. The yen last week weakened to 81.20 per dollar, above dollar-yen’s weekly ichimoku cloud top at 79.97 yen, and a close at the end of the month weaker than its 21-month moving average at 80.90 may propel the currency to decline to 88 per dollar, Jay Govender, a technical strategist at Barclays in New York, wrote in a note to clients.

“What we are looking for is a confirmation of the bear trend in yen,” Govender said in a telephone interview. “While we’ve had some upside traction in terms of dollar-yen, there are still a lot of things that need to be done.”

The yen rose 1 percent to 80.38 per dollar at 10:35 a.m. in New York. It has depreciated 8.1 percent this year for the worst performance among its nine developed-nation counterparts, according to Bloomberg Correlation-Weighted Currency Indexes.

The Japanese currency also needs to close above a weekly pound-yen cloud at 131.25 yen, Govender said. The pound fell 1.1 percent to 127.47 yen today.

Cloudy Forecast

Such bullish weekly cloud bases, which the dollar experienced last week against the yen, have resulted in a follow-through in the currency’s appreciation for one, two or more years in the past 10 years, Govender, along with Jordan Kotick, global head of technical strategy at Barclays, wrote in the note.

Ichimoku charts are used to predict a currency’s direction by analyzing the midpoints of historical highs and lows. The conversion line plots the sum of the highest high and lowest low over the past nine trading days. The baseline is the same calculation over the past 26 days.

The cloud refers to the area between the first and second leading span lines on the chart and is used to show an area where buy orders may be clustered.

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.

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