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I want to share a fundamental story about the yen and a technical aspect of the Yen that I’ve never noticed, as it nears a big breakout.

In 1985 finance leaders of major nations including Germany, France, UK, Japan and US signed into agreement the Plaza Accord which explicitly worked to devalue the US Dollar vs. the Japanese Yen and Deutsche Mark. The Yen appreciated from 50 to 120 over the next 10 years, a gain of 140%. The Yen’s appreciation was also fueled by easy money policy in the US after  equity market crashes in 1987, 1990, and 1992.

Yen appreciates 120% over 10 years 1985-1995

Yen appreciates 120% over 10 years 1985-1995

By the end of 1995, Japan’s export economy collapsed due to their strong currency and the rise of cheaper, emerging competitors including Malaysia, Indonesia, Thailand, and others. From 1991 through 1995, Japan’s Real GDP growth fell from 8% to (-2.4%) and the country entered a recession. This is reflected in the Asian Currency Crisis of 1997 where the hot money invested in emerging Southeast Asian markets exited quickly and left asset prices heavily inflated.

Between 1991 and 1995 the Yen erased almost all gains from the previous decade and depreciated 44% from 120 to 70 (monthly chart 1995-1998).

Japanese Yen depreciates from 120 to 70, or 44%

Japanese Yen depreciates from 120 to 70, or 44%

For the next 10 years, the Japanese Yen consolidated into a massive ascending triangle formation.

Japanese Yen in a massive ascending triangle consolidation pattern for 10 years (1998-2008)

Japanese Yen in a massive ascending triangle consolidation pattern for 10 years (1998-2008)

In 2008, the yen broke out due to what many analysts refer to as “safe-haven flows” following the collapse of the US and then global financial markets. After perfectly reaching its breakout target in October 2012 at an all-time high, the yen has now retraced 100% to the boundary of the ascending triangle (its actually beautiful the way it tells a story).

Japanese Yen completes target of triangle breakout and retraces the full move to current level ~100

Japanese Yen completes target of triangle breakout and retraces the full move to current level ~100

Most investors and analysts find it easy to attribute this year’s devaluation of the Yen to the BOJ’s current QE program, which is 3x the size of that of the Fed’s $85 billion/ month in bond purchases, intended to revamp Japan’s export economy and curb deflation.

If this triangle breaches the previous weekly low of 99.43, the downside target will be just above 89. On a single contract, that move is worth $12,862.50. If it breaks, there isn’t even support until 90 (2008 low).

Japanese Yen needs to break September 2013 low of 99.43 for short confirmation

Japanese Yen needs to break September 2013 low of 99.43 for short confirmation

Here it all is since 1985

The story of the Japanese Yen 1985 - 2013

The story of the Japanese Yen 1985 – 2013

Hope you guys enjoyed this story as much as I enjoyed learning it. It will be interesting to see if that long-term ascending triangle boundary line will come into play. Watch for the break – it’s a big move-a -comin!

-JK

 

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