This week, we’ve been taking a deep dive into one of the most forgotten markets in the world… currencies.
Yet the foreign exchange (FX) market is the biggest in the world (daily transactions average nearly $7.5 trillion). It also has little correlation to the stock market.
That means you can make money out of FX no matter what the stock market is doing.
The other great thing about the FX market right now is that it’s throwing up the best opportunities in over a decade.
On Tuesday, we saw how rapidly rising interest rates caused the euro to fall heavily against the U.S. dollar.
And then yesterday, we ran through a euro trade we did in my option advisory, The Opportunistic Trader, that generated a 37% return in just a week.
Today, I want to check out an even bigger move in the Invesco CurrencyShares Japanese Yen Trust ETF (FXY)…
Inflation Is Not “Transitory”
The chart of FXY below tracks the Japanese yen against the U.S. dollar…
When FXY is rising, the yen is increasing in value compared to the U.S. dollar. And when FXY falls, the yen is losing value against the U.S. dollar.
Each bar on the chart below represents one week of price action…
Invesco Currency Shares Japanese Yen Trust ETF (FXY) — Weekly Chart
Source: eSignal
You can see how flat FXY traded from 2019 to the start of 2021.
While you can’t see it here, this price action goes all the way back to 2014. Apart from the odd blip, FXY barely moved for nearly seven years.
However, coming into 2021, that all started to change…
After initially dropping to level ‘A’ (around its 2020 low), FXY traded sideways before dropping down to level ‘B.’
Again, FXY traded sideways until the reality that the Fed would need to raise rates started to bite…
You can see how sharply FXY broke below that support level (‘B’) once the market fully digested that inflation was not “transitory”… and that the Fed was now caught in a massive game of catch-up.
In the space of eight months, FXY lost nearly one-quarter of its value… and around one-third from its 2021 high.
Take another look…
Invesco Currency Shares Japanese Yen Trust ETF (FXY) — Weekly Chart
Source: eSignal
You can see how the Relative Strength Index (RSI) bearishly remained in the lower half of its range (below green line) for the entirety of FXY’s down move.
However, like any other market, currencies can overshoot… much like we saw here with FXY.
With the RSI and FXY showing a converging pattern (orange lines), FXY bottomed out and set itself up for a reversal.
When buying momentum increases like this, the stock price will eventually stop falling too. FXY then rebounded as the RSI broke higher and bullishly broke back into its upper range.
But with buying momentum waning, FXY’s bounce has also petered out.
So what am I looking for around here?
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Bullish Signs Tested
You can see that after its rally up to ‘1,’ FXY recently made a lower high at ‘2’…
This move coincided with the RSI tracking right back along support (red circle).
For FXY’s rally to resume, we’ll first want to see the RSI hold support… then begin tracking higher into its upper range.
The next test for FXY would be to take out its recent short-term high at ‘1.’
Another thing I’m watching is our MAs…
Although the 10-week moving average (MA, red line) broke above the 50-week MA (blue line) earlier this year, you’ll notice that it recently turned down.
For FXY’s rally to hold longer-term, we’ll also need to see both MAs begin to track higher.
I know that trading currencies may seem a bit complicated. It can be challenging to know where to start.
However, as this FXY chart shows, you could be missing out on some massive opportunities if you ignore this space.
I’ve learned from trading more than $500 billion of currencies since the 1980s. And I’m very excited to share my experience with my readers.
That’s why next week on April 19, I’ll be holding a special free event to show you how the FX market works… the best strategies to trade them… and the incredible profit potential we’re looking at right now.
To RSVP with one click, go right here to register for this event.
I hope I see you there.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict