Is the Yen the New Safe Haven for Currency Traders?

08/27/2010 12:01 am EST

Focus: FOREX

There's been a clear asset allocation into securities such as government bonds (see ETF TLT) and gold (see ETF GLD) as investors and traders look for safe harbors in this uncertain economic environment. With less attention, however, the Japanese yen has gained significant ground versus both the US dollar and the euro. Take a look at the chart below, which tracks dollar/yen forex (USD/JPY) and euro/yen (EUR/JPY). You can also utilize ETF FXY for tracking the yen.

Dollar/Yen and Dollar/Euro Chart

Click to Enlarge

First, you can see that the decline of dollar and euro vis-a-vis yen has basically been in tandem—indicating a clear safety preference for the Asian currency. Also note the big decline in late 2008/early 2009. This was in-line market weakness, however, there was not a corresponding selloff in March 2009 when the market panic bottom of SPX 666 occurred. This was a sign that the stock selloff was overdone.

Another factor to consider is that euro and dollar have actually breached to new lows below the 2008/2009 levels. Meanwhile, the stock market is far above those levels. Even if you throw out the 666 bottom, we're still fairly high above the 800/900 SPX levels reached in late 2008 and early 2009. If the market follows suit, keep an eye if SPX 1000 is breached in the coming days, because we may then go as low as SPX 900 (881 is also a Fibonacci level) in September. At that point, we may then see a strong market rally as mid-term elections approach/occur.

By Moby Waller of

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