The US dollar appears to be carving a low against the yen.
After a significant fall, investor ought to be sensitive to bottoming
patterns.
The first tell was the key reversal on March 26. In this case,
the key reversal was when the dollar made a new low for the move (~JPY104.55)
and then rallied to close above the previous session high.
The second tell was the divergence with the technical indicators.
The divergence is that the technical indicator did not confirm the dollar’s
low. The 14-day RSI made a low on March 23, not following session when
prices did. Indeed, the RSI made its low in the middle of February below
25. The MACDs also made its lowest in mid-February, and only experienced
a shallow dip when the dollar recorded its lows.
the Great
Graphic we made on Bloomberg. The dollar appears to have traced
a head and shoulders bottom pattern and is flirting with the neckline.
The left shoulder was formed at the start of the month. The head was the
two-session push below JPY105. The right shoulder was formed earlier this
week on the pullback below JPY106. The neckline is found by connecting
the rally after the left shoulder and head. It is found near
JPY107.00. The measuring objective is found by rotating the pattern on
the neckline. It projects to around JPY110.00.
We marked two other points on the chart. The first is a 200-day
moving average, which is now found near JPY110.65. The other is the 61.8%
retracement of the dollar’s decline beginning last November when it reached
JPY114.75, and that is found near JPY110.85. The 50% retracement is found
near JPY109.65.
The correlation between US Treasury yields and the dollar-yen exchange
rate broke down. On a 60-day rolling, percent change basis, the correlation
fell from 0.85 early last December to a low below 0.25 in mid-March. It
is recovering now and is a little below 0.40. The 30-day rolling
correlation is getting closer to 0.50 after a brief inversion in early
February.
We suspect some of the pressure on dollar-yen had been hedging activity
ahead of the end of the fiscal year. The beginning of the new fiscal
year may not spur strong capital outflows immediately, but the end of the
hedging operations may be sufficient to ease the pressure on the greenback.
That said, the interest rate differentials are attractive for Japanese
investors. The US offers 275 bp more than Japan at the 10-year
tenor. It has not seen much above 250 basis points since 2007. The
highest level in a decade was seen in February just below 2.90%. Hedging
out the dollar fully gives the yen based investor about 50 bp, which is
essentially what Germany offers on an unhedged basis.
The dollar-yen’s 60-day correlation with the Nikkei eased to 0.44, which
is the lowest in nearly three years. The 30-day correlation is even
low at 0.14. The exchange rate correlation with the S&P 500 over the
past 60 sessions is a little above 0.25. It is recovering from the dip
below 0.10. The 30-day correlation has sprung higher and near 0.47 is the
highest so far, this year.