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USD/YEN: Let the Trend Be Your Friend

By: Martin Tillier
Posted: 3/6/2013 12:04:00 PM
Referenced Stocks:

I have an uncomfortable truth for you. If you are sitting at home, trading FX, and you have ever hit the absolute top or bottom of a currency pair, it was lucky. If you have done it multiple times it was very lucky. This is not to say that you shouldn’t be trying to identify pivot points, or that you shouldn’t be doing research; of course you should. It is just that focusing on tops and bottoms is a bad habit to get into.

I thought of this over the last couple of weeks as I read a slew of stories maintaining that “the great Yen short” was over and selling USD/YEN and EUR/YEN was the way to go. For those of you who don’t really follow FX, toward the end of last year the Bank of Japan announced a ramping up of their QE program and ultra-easing of policy all round, designed to encourage growth. They were prepared to embrace inflation and a weaker Yen. The market duly obliged with the weaker Yen, as the USD/YEN chart below clearly shows.

EUR/YEN charts for the same period show the same pattern.

 

The uncertainty surrounding the Italian election results in February sparked a sell-off in both Yen pairs, and thus the stories about the end of the move. The dramatic nature of the drop, however, suggests that some profit taking contributed to the decline, making the move down in USD/YEN no more than a normal correction in an upward trend that is still intact. EUR/YEN could be the same, but I can’t escape the feeling that there is always bad news about the Euro just around the corner, making me wary of using it in long term, strategic positions. The usually short term nature of FX trades can make us forget that fundamental shifts can, and frequently do, happen in the relationship between currencies. I was working in the Tokyo FX market in 1990 when USD/YEN began its drop from just below 160.00. A lot of people got seriously burnt trying to find the long-term bottom of that move.

In this case, it is not so much a risk of getting it wrong as a risk of missing an opportunity. If you are obsessed with tops and bottoms, then it is hard to take a small, long-term long position in USD/YEN this far into a move. There is an overwhelming feeling that you have probably missed the opportunity. I would maintain that you haven’t. Japan seems determined to pursue economic growth, whatever the cost, and I learnt a long time ago that trading with, rather than against, a determined Government and Central Bank is generally a good idea.

So, get over the fact that you didn’t buy USD/YEN below 80.00. Forget, even, that you missed the bottom of the correction and didn’t buy at 91.00. Don’t let perfect be the enemy of good, because, as my wife frequently tells me for some reason, nobody’s perfect.

Martin Tillier has been dragged, kicking and screaming, into the 21st century and can now be followed on Twitter @MartinTillier.