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DOLLAR BREAKS DOWN, YEN BREAKS OUT,
JAPAN BID UP...
by Jes Black
Editor & Publisher FX Money Trends
October 8, 2004

Last week we explained that the lack of short positions against the dollar was the primary reason that the greenback had failed to rally alongside rising yields. On those grounds we forecasted a falling dollar in the weeks ahead but kept our bearish dollar bets limited to those with the most potential.

We indicated that the Australian dollar, Swiss franc and Japanese yen had net short positions against the dollar, giving them the most room to run in the event of a dollar breakdown.

The Aussie was the first to move, rising nearly 5% in the past month. Recall that three weeks ago we turned bullish on the Australian dollar and noted that this would give additional support to Australian iShares priced in US dollars. EWA is up 6% in those three weeks, in part due to the gain in AUD/USD.

In the FX market, today’s biggest winner was the yen which rose 2% and broke through its eight-month consolidation pattern.

As the yen rallied, Japan iShares (EWJ) rose 1% despite the Nikkei closing down on the day and stocks trading lower across the board. Now that it appears JPY/USD is breaking out, Japan iShares (EWJ) should receive a boost much in the same way as a rising AUD/USD helped EWA over the past month.

Moreover, as you can see in the chart below, the last time the yen broke out against the dollar was in August 2003, when the dollar fell below a 9-year trendline support. Upon the breakdown there was a sharp increase in net long JPY positions, a steep rise in bullish sentiment and strong gains in the Nikkei as foreign investors rushed in.

Today the yen has potentially broken out again. If so, speculators sitting on the sidelines waiting for confirmation of the larger trend at hand may soon step in to sell USD/JPY. In turn, EWJ may also break out of its consolidation pattern and then accelerate from $10 towards $12 in the weeks to come if JPY/USD continues to rally and attracts foreign inflows.

© 2004 Jes Black
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