I have always traded currencies for many reasons.
For a start, forex (FX) market is the biggest in the world. Daily transactions average $7–8 trillion.
FX also has little correlation with the stock market. You can often find strong FX setups when stocks are showing few opportunities.
And after bursting back into life recently, there could be even bigger moves ahead…
As we discussed yesterday, an important BRICS meeting is taking place today. Brazil, Russia, India, China, and South Africa will discuss their plans for challenging the supremacy of the U.S. dollar.
That has major ramifications for the economy. It can also affect how the dollar trades against other major currencies like the euro and the yen.
So today, we’ll look at the yen with the Invesco Currency Shares Japanese Yen Trust ETF (FXY).
Major Economic Factors
As a reminder, when FXY is rising, it means the Japanese yen is strengthening against the U.S. dollar (and vice versa).
FXY traded flat between 2019 and the end of 2020. Although you can’t see it in the chart below, that tight sideways range actually goes back to late 2016.
But in early 2021, FXY’s profile started to change…
Invesco CurrencyShares Japanese Yen Trust ETF (FXY) – Weekly Chart
Source: eSignal
Momentum fell, shown by the Relative Strength Index (RSI) breaking down through support (green line). And the yen’s massive fall got underway.
FXY’s down move saw the 10-week Moving Average (MA, red line) cross below the 50-week MA (blue line). Both MAs bearishly dropped lower.
The 10-week MA then began to accelerate below the 50-week MA as the yen’s fall intensified.
This sharp decline in FXY from early 2022 onwards came from two major themes:
-
The Fed started to jack up rates while the Bank of Japan (BoJ) left theirs on hold. That pushed the U.S. dollar higher.
-
Japan majorly relies on imported oil. So speculators sold down the yen in anticipation of a weaker Japanese economy as the oil price rallied off the back of the Ukraine invasion.
FXY’s fall only stopped and reversed in October last year when the BoJ stepped in to prop up (buy) the yen.
All up, the yen lost one-third of its value in the 21-month move. That’s a massive fall for a major currency.
As the chart shows, FXY bottomed out at ‘A.’ That coincided with a divergence between FXY and the RSI (orange lines) – a common reversal pattern.
Take another look:
Invesco CurrencyShares Japanese Yen Trust ETF (FXY) – Weekly Chart
Source: eSignal
When we looked at FXY in April (red arrow on the right), FXY was trying to carry that rally over into this year. But that rally had stalled.
That was right around when the RSI was testing support (red circle).
The RSI was unable to hold support and has since tracked lower. And FXY has continued to slide…
So what am I looking for around here?
Free Trading Resources
Have you checked out Larry’s free trading resources on his website? It contains a full trading glossary to help kickstart your trading career – at zero cost to you. Just click here to check it out.
Repeating Reversal Pattern
On the chart, the red lines show the start of another potential reversal pattern.
If this current converging pattern repeats like the one from last year (orange lines), we could see FXY bounce again.
Remember, a sustained increase in momentum (RSI) will eventually drive a stock (or currency) higher.
Beyond that, we’ll look for the RSI to test and break through resistance for any longer-term up move to play out.
We’ll also watch for the 10-week MA to break back above the 50-week MA with both tracking higher.
Yet it’s still early days with this move…
If the RSI’s move higher fails and it drifts lower, then FXY will likely continue its fall.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. Today, the BRICS countries are meeting to discuss their plans to level the global playing field.
They dislike West’s economic influence for a number of reasons. As a Reuters article puts it, they have a long list of grievances:
Abusive trade practices. Punishing sanctions regimes. Perceived neglect of the development needs of poorer nations. The wealthy West’s domination of international bodies, such as the United Nations, the International Monetary Fund or the World Bank.
That’s why this meeting is worth paying attention to. These countries are determined to challenge the status quo – and, in the long run, end the reserve status and supremacy of the U.S. dollar.
And while that would cause an economic tumult, it will also create truly outsized trading opportunities.
If you’d like to hear how I see things playing out, then be sure to click here…