The Japanese Central Bank vs. The Market?
On May 12,
we presented the chart below saying : "The long-term chart clearly shows that the USDJPY exchange rate is in the process of completing a head-and-shoulder reversal and that the pressure is on the down-side."
We already recommended to buy the JPY against USD on November 7, 2002, at 121.83.
We also added that "The Japanese Central Bank will naturally try to stop the ascent of the Yen and it is rumoured that it is intervening secretly. It is however well-known that market forces will win in the end."
The twenty-year picture
Charts going back several years show one thing: Trends often last several years. From 1985 to 1988, the Yen surged 100%. After losing 50% of its value from 1988 to 1990, the Yen-bull-market resumed and lasted five years this time for another gain of 100% which took it to an all-time high of 79.75 Yen per USD by April 1995.
Over a period of three years, the fell again to touch almost 150 by mid-98, then strengthened again, fell again. So let's have a look at the weekly chart to see what has been happening over the last three years:
The long-term picture
In the chart picture above, you see what is commonly described as a "Head-and-Shoulder-Formation", a typical reversal pattern.
After hitting a recovery peak at the beginning of 2002 (head) the JPY strengthened considerably over a period of a few months and bounced off what today has become the "neckline". A "shoulder" (R) was formed which resembled the left "shoulder" (L).
From then on, it was mainly a question how long the neckline would hold and we assume that it held for so long because the Japanese central bank, which did not want a strong Yen because it would hurt exports, successfully manipulated the market by buying massive amounts of dollars.
But as we said before, while central banks are powerful in the short- to medium-term, in the long-term, markets will win, a thing which seems to be happening now.
The medium-term picture
In May of this year, when we recommended to buy JPY against the USD at 117.30, it rose indeed to 115.02 in a matter of days. Nevertheless, the Japanese central back defended the "neckline" successfully and managed to weaken the Yen once more to the 120 level. Traders who were long Yen, had to cover their positions, accelerating thus the movement.
It also seemed that most traders did not feel any strength to bet against a powerful central bank and abandoned the game altogether as a trader cannot wait for a central bank to throw in the sponge. Otherwise he could not be called a trader.
During the last few days, the neckline has been pierced decisively signalling that the Japanese have possibly given way to the reality that the Yen/dollar exchange rate has to be readjusted.
The short-term picture
This weekend, while ware are writing this lines, finance ministers of the G-7 meet in Dubai to discuss, among other topics, the question, how China and Japan can be induced to accept a revaluation of their currencies versus the US-dollar and to refrain from further interventions in the currency markets.
The fact that the Yen has in fact strengthened ahead of the meeting could indeed signal that the Japanese have finally accepted a certain revaluation of their currency. If this is were so, it would of course be hard to guess to what extent such a higher valuation would be acceptable to the Japanese.
But if the Japanese have really given in, we could imagine that an exchange rate USDJPY of 100 sometime in the not too distant future is attainable.
On Friday, the Yen reached the highest level over the past two and half years. It may well be the start of a movement of bigger proportions.
The following recommendations were valid at the time of writing, viz. at
and not necessarily when you happen to read them.
Yours sincerely,
Peter Zihlmann
www.pzim.com
investment@pzim.com
September 24, 2003
Disclosure: The author has not been paid to write this article, nor has he
received any other inducement to do so. The author is a shareholder in the
company and will benefit from any increase in the company's share price.
Disclaimer: The author's objective in writing this article is to invoke an
interest on the part of potential investors in this stock to the point where
they are encouraged to conduct their own further diligent research. Neither
the information, nor the opinions expressed should be construed as a
solicitation to buy or sell this stock. Investors are recommended to obtain
the advice of a qualified investment advisor before entering into any transactions
in the stock.
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