Yen Finds Support in Euro Cloud After BOJ Drop: Market Reversal

The yen’s decline to the weakest level in four years versus the euro as the Bank of Japan commits to unprecedented stimulus may have set it up for a rally, trading patterns suggest.

In its 43 percent slide from a 12-year high of 94.12 per euro in July 2012, the yen is forming a pattern known as an ascending wedge, according to Commerzbank AG. A break below the lower support line in the wedge, based on closing prices, may signal a potential reversal of about 7 percent. The yen’s drop is also is pushing the Japanese currency toward the top of its monthly ichimoku cloud, a support level unbroken since 2008.

“I’m watching a potential rising wedge-reversal pattern for euro-yen,” Karen Jones, a London-based technical strategist at Commerzbank, said in a Nov. 13 phone interview. “We are still within the confines of a converging range. Normally you should break out of the rising wedge pattern in a dynamic way.”

The euro is the best performer this year and the yen the worst among 10 major currencies tracked by Bloomberg Correlation Weighted Indexes. The currency bloc emerged from its longest recession on record while the Japanese government is seeking to end 15 years of deflation in the world’s third-largest economy.

The euro gained 6.2 percent against its major peers this year, while the Japanese currency dropped 12 percent, the indexes show. The dollar rose 3.7 percent.

Doubling Purchases

The BOJ doubled monthly bond purchases to more than 7 trillion yen ($69.7 billion) on April 4 in a stimulus program targeting 2 percent inflation in two years. The extra money supply tends to weaken a currency.

The yen may slide to the top of the wedge around 135.75 before reversing, according to Commerzbank’s Jones. A subsequent weekly close through the opposite side of the wedge, which currently appears at 131.50, would then be required for a rally, she said.

In that case, Jones sees the yen appreciating to 122.80. The target is based on projecting the difference between the top and bottom of the wedge in its widest form, she said.

The yen’s decline is pulling it closer to the top of an indicator known as the monthly ichimoku cloud, Bloomberg data show. Orders to buy the yen and sell the euro may be gathered at the level of 135.36 yen, the data indicate. The Japanese currency hasn’t traded through the top of the cloud since October 2008.

Ichimoku Cloud

The yen weakened 0.3 percent today to 135.12 per euro as of 12:55 p.m. in New York. It depreciated to 135.51 on Oct. 22, the lowest since November 2009, data compiled by Bloomberg show.

Ichimoku charts are used to predict a currency’s direction by analyzing the mid-points of historic highs and lows. The conversion line plots the sum of the highest high and lowest low over the prior nine data points. The baseline is the same calculation over the past 26 points.

The cloud refers to the area between the first and second span lines on the chart and is used to show an area where trading orders may be clustered. Using monthly ichimoku strategy to trade the yen versus the euro over the past decade would have generated a return of around 6.5 percent.

Monthly stochastics show the yen is the most oversold in more than six years.

Stochastics study measures the velocity of a security’s price movement to identify overbought and oversold conditions. The indicator, or “k-line,” measures the current price relative to highs and lows over a certain time period. Some analysts consider it a buy signal when the k-line crosses above its own moving average, or “d-line,” in the oversold area.

Growing Economy

The k-line of the yen’s monthly slow stochastic indicators versus the euro was oversold yesterday, data compiled by Bloomberg show.

The euro-area economy expanded 0.1 percent in the third quarter from 0.3 percent previously, a report showed yesterday, in line with the median of analyst forecasts in a Bloomberg News survey. Japan’s economy grew 0.5 percent in the same period from 0.9 percent previously.

“Positive global risk sentiment” is helping drive yen weakness, Jens Nordvig, the managing director of currency research at Nomura Holdings Inc., Japan’s biggest brokerage, wrote in a note. “We like trading the yen short from a basket” of the dollar, pound and euro, he said, referring to a bet the Japanese currency will fall.

The European Central Bank could cut interest rates to below zero, Executive Board member Peter Praet said Nov. 13, after policy makers unexpectedly lowered the benchmark rate to a record 0.25 percent last week to combat falling inflation.

Standard Bank Plc’s foreign-exchange model indicators generated a signal to sell the euro and buy the yen at 132.90 on Nov. 1, according to Steve Barrow, the bank’s head of Group-of-10 research in London.

“Rate differentials are pointing euro-yen down after last week’s ECB cut,” Barrow said in a phone interview yesterday.

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