Summary
- JPY pairs and USDJPY are lagging the move we've seen in the stock market.
- A Bloomberg’s forecast for the Q4 2019 reveals that the Yen is poised to see the biggest advance into the end of the year.
- Heading into the end of the year and with such a bearish sentiment on JPY pairs, it feels like a perfect storm builds for the JPY pairs to squeeze even.
- This idea was discussed in more depth with members of my private investing community, The Lead-Lag Report. Get started today »
I am advocating a weak yen to a certain extent. – Naoto Kan
That is not the point of this article. I'm advocating for a contrarian trade – a much weaker Yen (NYSEARCA:FXY) ahead. One month ago, I was arguing that the JPY pairs and USDJPY, in particular, are lagging the move we've seen in the stock market.
The argument was that the USDJPY pair almost fully retraced the rally that followed Trump's election. A stunning decoupling from the US equities. While US indices made new highs, the USDJPY didn’t follow. Curiously enough, it strongly correlated with the stock market corrections, but not participating in its rallies.
Not much changed in the meantime, with the pair consolidating the 108 handle. But as we move into the end of year trading, a contrarian approach might trigger a rally.
To start with, the stock market picture looks mixed. In one of the last Lead-Lag Reports, I mentioned that analysts are pretty optimistic about revenue and earnings estimates for 2020, questioning if this is really justified or not.
There's a reason to be cautious. A Bank of America (NYSE:BAC) survey shows how bearish investors are despite rallies, favoring defensive assets like cash, investment trusts, and staple stocks.
The bullish case for stocks doesn't look right. It doesn't help a bearish JPY scenario.
Furthermore, a Bloomberg’s forecast for the Q4 2019 reveals that the Yen is poised to see the biggest advance into the end of the year.
Yet, the JPY pairs rallied these last weeks. USDJPY, EURJPY, AUDJPY, GBPJPY and co., they’re all up, especially the crosses. Is the recent rally in the USDJPY from 104 to 108 the start of a stronger mover? Or it’ll fade towards the end of the year as pointed by the Bloomberg’s forecast?
In Japan, core machine orders had a 2nd straight MoM decline and the largest annual fall since late 2014. Data for the non-manufacturing sector is particularly troubling as it fell 12.1% from a year ago.
But above all, the price action on the JPY pairs isn’t bearish. That’s all that matters from a trader’s perspective.
If anything, the USDJPY evolves in a massive bullish flag formation. The mother of all bullish flags has a projected measured move above the double top that caped the Trump’s rally in 2016. More precisely, well above the 126 mark!
A bullish flag is a tricky technical pattern, to say the least. Here’s why. First, it doesn’t have a time limit for the flag’s formation. The best trade to be in is during the poll (if you’re lucky and are in for different reasons) or on the breakout. Second, when there’s a downward angle, the market often tries to invalidate the flag (i.e. trying for the poll’s lows).
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This article was written by Michael A. Gayed. An author on Seeking Alpha and founder of the Lead Lag Report.
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