By Ron William, CMT, MSTA

JPY Intervention: The Third Strike!
After yet another JPY intervention by the Ministry of Finance, investors and traders around the world are questioning the “real” impact on the currency’s eternal price appreciation. The estimated ¥7 trillion injection used to counter the JPY’s record overvalued levels, which continues to hurt the nation’s export-led economy, was the largest on record, overshadowing previous efforts last seen in August.

Indeed, the vast amount of government liquidity marked a large enough carbon footprint that saw USD/JPY rocket by over 400 pips in just a few minutes from new post-World War II record lows at $75.35. The net effect was largely positive for the USD, boosting the DXY (which allocates its second largest weighting of 13.6% to JPY). This also helped trigger a loud firing shot across popular risk proxies such as EUR/USD, AUD/USD and developed equity markets including the S&P 500, which all reversed sharply from key chart levels, back under their long-term 200-day moving averages.

But will the third intervention strike this year by the Japanese authorities be enough to hold back the JPY’s painful appreciation? In the end, the price chart – “Mr. Market” – dictates the future, where “in the short-run, the market is a voting machine, but in the long-run it is a weighing machine” and market sentiment will ultimately decide.
Technical evidence suggests that although the initial reaction on the JPY, post intervention, was stronger than after previous attempts; the price reversals are becoming less sustainable each time. Without the compounding backdrop of a key change in the market cycle(mass psychology) and perhaps additional monetary-political support from G-7 governments, any benefits may only prove temporary.
The only lasting currency devaluation this year followed the earthquake in March and consequential multilateral intervention, which served as a double-positive of external influences on the JPY. (Note; event shocks, natural disasters or political wars, have tended to historically induce major price reversals in markets).
However, a review of Japan’s most recent unilateral interventions in August this year and September 2010 shows it took only 4 and 15 days respectively for USD/JPY to trigger a post intervention retracement (PIR) and new low (PINL). The fact that each intervention is having a decreased effect over time suggests the credibility of the Bank of Japan’s ability to influence the JPY has likely diminished for traders. History also teaches us that virtually all JPY interventions over the last ten years exhibit comparable short-term reversion and timing characteristics.

USD/JPY Sentiment& Strategic Price Levels
USD/JPY remains bullish over the medium to longer-term, but in the short-term expect another post intervention retracement which may carve out a fresh new record low. This is also favoured by current sentiment measures which remain heavily skewed in the option market (based on 1 month 25-delta Risk/Reversals), which shows long call options at multi-year highs. Put simply, USD JPY buying pressure is still very overcrowded as everyone continues to try and successfully call the market bottom.

This may trigger a temporary, but dramatic,price spike (that would help flush out a number of large downside barriers and stop loss-orders), into psychological levels at $75.00 and perhaps even sub-$74.00. Keep in mind that such a scenario would also inspire another round of even stronger JPY intervention that would likely benefit from the price vacuum and assist their mandate of sustainably reversing the JPY’s trend.

Watch strategic upside price levels on USD/ JPY ahead of important cycle inflection points into November-December 2011;$80.00 (Psychological), then $82.00 ( post-G7 intervention high) and $83.30 (28th March earthquake high). All levels serve as very important bullish psychological triggers in the market.

Astute investors and traders might find additional diversified methods to manage risk/return exposure within option strategies, during what may continue to be a two-way, volatile market over the next 1-3 month horizon. High-probability option strategies include a “long straddle”, which would favour increased volatility (regardless of price direction) or a “long call” that would hedge for the likely upside breakout from USD JPYs multi-year wedge pattern.

Major Cycle Reversal
Macro chart dynamics confirm that a major turning point is developing on USD/JPY. Long-term monthly charts exhibit a confluence of bullish evidence with our primary focus on the related 40-year Elliott Wave cycle and DeMark™ sequential/combo exhaustion buy signals.

The 40 year long-term impulsive Elliott Wave cycle on USD/JPY is on the edge of a major upside reversal. Closer examination also illustrates a symmetrical time fractal of 16.5 years which is scheduled to end into this November-December 2011.
The expanded chart (right-hand side) illustrates DeMark’s bullish monthly reversal signal (Sequential & Combo), which was developed in late 2010. Although this long-term signal has not yet triggered the expected price upside reversal, we must respect that it has, thus far, managed to cap USD/JPY’s powerful decline.
A TD Price Flip and close above $78.79-80.56 (TD MA1-TD Ref Close), would be needed to trigger the major upside reversal higher. Only a sustained close beneath the $76.80-76.50 (TD Risk Line-TD Ref Close) would negate the bullish macro setup.

What are the best FX Trades to profit from JPY weakness?
The global market attention and potential major trend reversal will keep volatility high for a while. It might also be valuable to look at other relative currency opportunities against the Japanese yen, ratherthan only USD/JPY and EUR/JPY major rates.

Figure 7. illustrates a technical model which measures relative performance (based on proprietary momentum filters), across a basket of FX rates against the Japanese yen. Each quadrant represents a market’s cycle, rotating clockwise, from “leading“ to “weakening” and “lagging” to “improving” stages.

The results derived from this unique visualization of market relative performance over time tells us that high-yielding currencies such as TRY, BRL and ZAR are setup to gain most from JPY weakness (positioned within the upper right “leading”quadrant). All three markets exhibit strong bullish mean reversion characteristics from extremely undervalued levels against the JPY.

Conclusion
USD/JPY remains bullish over the medium to long-term, but in the short-term expect another Post Intervention Retracement (PIR) as the credibility of BOJ’s third strike attempt this year to reverse JPY diminishes with traders. Sentiment and liquidity measures also suggest that USD/JPY buying pressure is still very overcrowded as everyone continues to try and successfully call the market bottom. This may lead to a temporary, but dramatic spike into the psychological levels at $75.00 and perhaps even sub-$74.00.
In the end, “Mr. Market” will decide USD/JPY’s fate as the rate edges closer to its40 year long-term cyclical reversal (which will trigger a major change in mass psychology). This will also mark another wave of change in global safe-haven flows, which has traditionally been attracted to the JPY and previously CHF and Gold. In a relatively weak beauty contest, the USD, which has been at a polar opposite technical setup at historic lows, will continue to gain from this domino effect, as capital searches for a new safe home.

However, in the short-term, USD/ JPY will remain a “house of pain” trade, marked by two-way volatility. Astute investors and traders might additional methods to manage their risk-reward exposure through option strategies. Watch strategic upside price levels on USD/ JPY ahead on important cycle infection points into this November-December 2011; $80.00 (Psychological), then $82.00 (post G7 intervention high) and $83.30 (28th March earthquake high). In relative terms, high-yielding currencies such as TRY, BRL, ZAR, are setup to gain most from a massive unwind of the popular carry trade.

By Ron William, CMT, MSTA

JPY Intervention: The Third Strike!
After yet another JPY intervention by the Ministry of Finance, investors and traders around the world are questioning the “real” impact on the currency’s eternal price appreciation. The estimated ¥7 trillion injection used to counter the JPY’s record overvalued levels, which continues to hurt the nation’s export-led economy, was the largest on record, overshadowing previous efforts last seen in August.

Indeed, the vast amount of government liquidity marked a large enough carbon footprint that saw USD/JPY rocket by over 400 pips in just a few minutes from new post-World War II record lows at $75.35. The net effect was largely positive for the USD, boosting the DXY (which allocates its second largest weighting of 13.6% to JPY). This also helped trigger a loud firing shot across popular risk proxies such as EUR/USD, AUD/USD and developed equity markets including the S&P 500, which all reversed sharply from key chart levels, back under their long-term 200-day moving averages.

But will the third intervention strike this year by the Japanese authorities be enough to hold back the JPY’s painful appreciation? In the end, the price chart – “Mr. Market” – dictates the future, where “in the short-run, the market is a voting machine, but in the long-run it is a weighing machine” and market sentiment will ultimately decide.
Technical evidence suggests that although the initial reaction on the JPY, post intervention, was stronger than after previous attempts; the price reversals are becoming less sustainable each time. Without the compounding backdrop of a key change in the market cycle(mass psychology) and perhaps additional monetary-political support from G-7 governments, any benefits may only prove temporary.
The only lasting currency devaluation this year followed the earthquake in March and consequential multilateral intervention, which served as a double-positive of external influences on the JPY. (Note; event shocks, natural disasters or political wars, have tended to historically induce major price reversals in markets).
However, a review of Japan’s most recent unilateral interventions in August this year and September 2010 shows it took only 4 and 15 days respectively for USD/JPY to trigger a post intervention retracement (PIR) and new low (PINL). The fact that each intervention is having a decreased effect over time suggests the credibility of the Bank of Japan’s ability to influence the JPY has likely diminished for traders. History also teaches us that virtually all JPY interventions over the last ten years exhibit comparable short-term reversion and timing characteristics.

USD/JPY Sentiment& Strategic Price Levels
USD/JPY remains bullish over the medium to longer-term, but in the short-term expect another post intervention retracement which may carve out a fresh new record low. This is also favoured by current sentiment measures which remain heavily skewed in the option market (based on 1 month 25-delta Risk/Reversals), which shows long call options at multi-year highs. Put simply, USD JPY buying pressure is still very overcrowded as everyone continues to try and successfully call the market bottom.

This may trigger a temporary, but dramatic,price spike (that would help flush out a number of large downside barriers and stop loss-orders), into psychological levels at $75.00 and perhaps even sub-$74.00. Keep in mind that such a scenario would also inspire another round of even stronger JPY intervention that would likely benefit from the price vacuum and assist their mandate of sustainably reversing the JPY’s trend.

Watch strategic upside price levels on USD/ JPY ahead of important cycle inflection points into November-December 2011;$80.00 (Psychological), then $82.00 ( post-G7 intervention high) and $83.30 (28th March earthquake high). All levels serve as very important bullish psychological triggers in the market.

Astute investors and traders might find additional diversified methods to manage risk/return exposure within option strategies, during what may continue to be a two-way, volatile market over the next 1-3 month horizon. High-probability option strategies include a “long straddle”, which would favour increased volatility (regardless of price direction) or a “long call” that would hedge for the likely upside breakout from USD JPYs multi-year wedge pattern.

Major Cycle Reversal
Macro chart dynamics confirm that a major turning point is developing on USD/JPY. Long-term monthly charts exhibit a confluence of bullish evidence with our primary focus on the related 40-year Elliott Wave cycle and DeMark™ sequential/combo exhaustion buy signals.

The 40 year long-term impulsive Elliott Wave cycle on USD/JPY is on the edge of a major upside reversal. Closer examination also illustrates a symmetrical time fractal of 16.5 years which is scheduled to end into this November-December 2011.
The expanded chart (right-hand side) illustrates DeMark’s bullish monthly reversal signal (Sequential & Combo), which was developed in late 2010. Although this long-term signal has not yet triggered the expected price upside reversal, we must respect that it has, thus far, managed to cap USD/JPY’s powerful decline.
A TD Price Flip and close above $78.79-80.56 (TD MA1-TD Ref Close), would be needed to trigger the major upside reversal higher. Only a sustained close beneath the $76.80-76.50 (TD Risk Line-TD Ref Close) would negate the bullish macro setup.

What are the best FX Trades to profit from JPY weakness?
The global market attention and potential major trend reversal will keep volatility high for a while. It might also be valuable to look at other relative currency opportunities against the Japanese yen, ratherthan only USD/JPY and EUR/JPY major rates.

Figure 7. illustrates a technical model which measures relative performance (based on proprietary momentum filters), across a basket of FX rates against the Japanese yen. Each quadrant represents a market’s cycle, rotating clockwise, from “leading“ to “weakening” and “lagging” to “improving” stages.

The results derived from this unique visualization of market relative performance over time tells us that high-yielding currencies such as TRY, BRL and ZAR are setup to gain most from JPY weakness (positioned within the upper right “leading”quadrant). All three markets exhibit strong bullish mean reversion characteristics from extremely undervalued levels against the JPY.

Conclusion
USD/JPY remains bullish over the medium to long-term, but in the short-term expect another Post Intervention Retracement (PIR) as the credibility of BOJ’s third strike attempt this year to reverse JPY diminishes with traders. Sentiment and liquidity measures also suggest that USD/JPY buying pressure is still very overcrowded as everyone continues to try and successfully call the market bottom. This may lead to a temporary, but dramatic spike into the psychological levels at $75.00 and perhaps even sub-$74.00.
In the end, “Mr. Market” will decide USD/JPY’s fate as the rate edges closer to its40 year long-term cyclical reversal (which will trigger a major change in mass psychology). This will also mark another wave of change in global safe-haven flows, which has traditionally been attracted to the JPY and previously CHF and Gold. In a relatively weak beauty contest, the USD, which has been at a polar opposite technical setup at historic lows, will continue to gain from this domino effect, as capital searches for a new safe home.

However, in the short-term, USD/ JPY will remain a “house of pain” trade, marked by two-way volatility. Astute investors and traders might additional methods to manage their risk-reward exposure through option strategies. Watch strategic upside price levels on USD/ JPY ahead on important cycle infection points into this November-December 2011; $80.00 (Psychological), then $82.00 (post G7 intervention high) and $83.30 (28th March earthquake high). In relative terms, high-yielding currencies such as TRY, BRL, ZAR, are setup to gain most from a massive unwind of the popular carry trade.