Japanese Yen

I exited positions in the Japanese Yen on Monday.  My reasons for first initiating positions in the Yen back on 3/22/12 had little to do with the outlook for the Japanese economy.  To the contrary, the long-term outlook for a country that remains mired in a two decade long economic slump remains troubled due to a sizable debt burden and a bleak demographic age profile.

Instead, the Yen position was almost purely driven by short-term technical factors.

First, the Japanese Yen is one of the few investments that has a strong negative correlation to the U.S. stock market, which is currently at -0.40 since the beginning of the financial crisis.  Thus, owning the Japanese Yen provided an opportunity to hedge against a decline in the stock market.

Also, the Japanese Yen had sold off precipitously during the period from early February to late March.  As a result, the Yen was deeply oversold at the time of purchase and represented a favorable upside opportunity from a risk-adjusted returns perspective.

Since first establishing the Japanese Yen position back on 3/22/12, it has steadily rallied by +5.3% through Monday.  But following a sharp rise over the past week, the short-term thesis for owning the Yen had played itself out for the following reasons.  First, it had reached firm resistance at its 200-day moving average (red line on chart above).  Second, it had run into a long-term resistance line at 126 on the FXY.  Lastly, it had reached technically overbought levels with a Relative Strength Index reading of 70.  The last several times the Yen had entered overbought territory, it subsequently corrected lower.

For these reasons, the opportunity was taken on Monday to close out positions in the Japanese Yen.  I will continue to monitor the currency, however, and may look to reinitiate positions in the defensive currency if newly attractive short-term entry points present themselves in the coming weeks.

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