Looking for a Tradable Bounce in the Currency Wars

02/13/2013 9:00 am EST


Amid growing concerns that central bankers have launched currency wars in a desperate effort to jumpstart their flagging economies, Greg Harmon of Dragonfly Capital takes a look at the currency that has dominated the headlines the most in recent months.

The Japanese yen had a monster run against the US dollar off of the 2007 bottom. Peaking late last year, the government has since been on a path of devaluing the currency, joining the US and the Eurozone in a race to the bottom. The Japanese have been winning this race over the last four months with the yen falling over 20% against the US dollar. The weekly chart of the ETF tracking the yen (FXY) shows the steep pullback but gives some hope for a tradable bounce as well.

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First, it has retraced 50% of the major move higher. If it is to find support, this is a likely place for it to happen. Second, if you look at the relative strength index (RSI), it is at an extremely oversold level. Prior to this run lower, it had never seen a level under 25. If we focus in on the daily chart, you can see a divergence has already come in with the RSI turning higher as the price continued lower over the last six weeks.

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The yen may be ready to turn back higher with the current consolidation. What does this mean? It is not time to go out and buy the yen yet, but it is time to get ready and definitely time to take off some shorts, if you have been playing that side (Yes, that was for you, Dennis Gartman).

By Greg Harmon of Dragonfly Capital

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