first majestic silver

Us Dollar Versus Japanese Yen

November 8, 2005

The twenty-year picture

From 1985 to 1995, the Japanese Yen went from strength to strength, a phenomenon only interrupted during a brief period in 1989, resulting in an amazing loss of 71% of the US dollar against the Japanese currency.

Above twenty-year chart shows us two things: long-term trends can and often do last for many years, on one side, and, on the other side, that trend-reversals are often sudden and violent as happened in 1990 and 1998.

As at present, the US dollar approaches once again a significant over-bought condition against the Japanese currency, the risk of a sudden trend-reversal also increases daily which should warn us from ignoring the dangers lying ahead.

So let us analyse the five-year view which may give us further clues of what may be in store.

The long-term picture

Whatever indicator you prefer to watch, it will never tell when exactly feelings of greed or fear have reached a climax or the point of greatest intensity or force in an ascending series or progression. Nevertheless, it tells you very precisely that the higher (or lower) we go, the closer we get to a reversal of fortunes.

Compare the peak of 2002, which signaled a multi-year reversal, with the one at present. All we can say is that the danger gauge is high, but not as high as on 2002.

The point is not trying so much to guess where the peak may be but to wait till we start declining from the peak.

Fundamental considerations in fact do not favor a strong US Dollar as the U.S. Trade Deficit widened after a five-month break as fast rising imports outstrip gains in exports

The U.S. trade deficit expanded in September for the first time in six months as a record increase in imports outpaced solid gains in exports, the Department of Commerce said.

After narrowing at an uneven pace for five consecutive months, the trade gap widened by 4.8 percent to $41.3 billion from a revised figure of $39.5 billion in August.

Exports jumped by 2.7 percent to $86.2 billion, the highest level since May 2001, and imports surged by 3.3 percent to a record monthly high of $127.4 billion, according to figures released by the department.

Making up the overall deficit were a deficit in goods of $48.3 billion -- a $1.8 billion increase from the previous month -- and a surplus in services of $5.2 billion, virtually unchanged from August.

The medium-term picture

The medium-term picture reveals in fact a surprisingly clear message: The RSI gave excellent sell-signals whenever it crossed the line at 75. It did so in April and again in July of this year.

At present, the indicator stands at 75.70 which should tell you precisely what to do, viz. to short the US Dollar against the Japanese Yen. However, you have to bear in mind that reversal need some time to unfold as sentiments do not change over night, unless some unexpected event delivers the spark.

Note that in July, there was a spike up to 114 before the correction got under way.

The short-term picture

What we know is that the US dollar is massively overbought in relation to the Japanese Yen. What we do not know is in which way the point of culmination will present itself: it could be a sharp reversal but it could also be a lengthy procedure. Only the future will tell.

Nevertheless, if you take y two to twelve months view, we advise short the US dollar.

The following recommendations were valid at the time of writing, viz. at

and may no longer be relevant at the time of reading.


Peter Zihlmann


www.pzim.com
[email protected]
[email protected]


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