The Yen: A Contrarian Play

The Yen’s eight-month clobbering is no secret -- it’s down over 20%. But what’s interesting is how the Yen seems unable to trade below parity with the dollar.

Rising Inflation
Recent data out of Japan shows inflation expectations are on the rise, so why not see a bounce in Japan’s currency after such a vicious onslaught? The point is, I just don’t see the Bank of Japan (BoJ) getting to its 2% inflation target. Not in this environment. Either backlash over what many will call a "currency war” -- or long-term Yen buyers finding value at the current “20% discount” -- should eventually put a temporary floor under the Yen. That said, view any move higher as just a bounce in a longer-term down trend.

Here are two views of the Yen -- a weekly (top chart) and daily (bottom chart) view. The weekly shows the big picture where a potential triple top seems in the making. Use the daily chart to evaluate your entry and exit points on bullish trade.


The Yen has been consolidating just above par (June futures) for the last three weeks. On the daily chart, the 20-day MA (dark blue line) is being probed, which should get momentum moving to the upside on a settlement above that pivot point.

Risk
I’ve started to work into bullish trade with some of my aggressive clients. I am not advocating any outright futures plays at this time, as the risk is too great. I do think it’s worthy of an option trade.

The Play
As I’m looking for a quick pop, I’ve opted to position clients in June contracts. Traders looking for a longer window are advised to price out plays in September contracts, which have three times more time to expiration. Back-ratio spreads are my favored play -- look to sell one (1) out-of-the-money call and buy multiple calls at further out-of-the-money strikes, positioning yourself for the upside volatility. Use the Fibonacci levels above as your objectives. In a perfect world we’d like to see a swift advance to $1.0475 -$1.0500.