Andy Krieger's Thoughts on the Market - 7 December 2023

Up the Stairs, Down the Elevator – The Reversal in Dollar Yen Has Started

This has been a strange year in the markets, with many securities, currencies, and commodities having been driven way beyond rational valuation levels due to the building up of massive speculative exposures. Eventually these distortions will get sorted out and corrected by market forces, but this process can take a long time. Accordingly, we should remember the famous warning of John Maynard Keynes that markets can remain irrational for longer periods of time than many players can remain solvent. As I survey the markets looking for investment opportunities, I can safely note that nowhere has this distortion been more obvious this year than in the movement of dollar-yen and the various yen crosses, and I can further confirm that the market’s corrective forces in the yen are now coming into play.

As I wrote in my recent write-ups of November 19, 2023, and December 3, 2023, I felt that the yen was very close to a major turning point which would ultimately lead to a dramatic reversal of the yen’s weakness. My big picture market analysis – both fundamental and technical – was screaming out that the coming moves in this currency would be fierce and relentless. My instincts told me that this reversal was imminent, but I had little proof of this in the price action. The recent price action, however, has finally confirmed it.

The market action around the 151.90 level was particularly telling, as it was clear that the sellers of yen had run out of ammunition. There was no energy in their repeated attempts to take out the prior highs and start another leg higher in Dollar yen towards the 155.00 – 160.00 levels. Rather, I would go so far as to say I saw multiple signals that the yen’s weakness was overdone at a level of historical proportions.

Since the 28th of November, we have seen the yen start to behave in the manner I had been forecasting. The dollar’s sell-off was starting to gain some traction, having dropped a few yen from the recent dollar highs, but it had failed multiple times to take out what was proving to be stubborn support around the 146.50 level. The bounces, however, were getting smaller, and finally the Dollar broke down against the yen in Tokyo today, slicing through the levels of recent support. The Dollar’s move picked up momentumduring the day, eventually dropping five yen and hitting a low of 141.50 around mid-day New York. We haven’t had a move of even four yen since the dollar was cascading lower from 151.95 to 127.22 in October, November, and December of 2022. Clearly, something has changed.

This is a perfect example of Dollar yen’s proverbial pattern of climbing up the stairs in a slow, somewhat cumbersome fashion prior to then crashing off down an elevator shaft in a violent fashion. My feeling is that today is just the first day of many further aggressive down days to follow – but they won’t come in rapid succession. Rather, I would expect these moves to be followed by periodic corrective patterns that can last between two and ten trading days, depending on where we are in the cycle. The good news is that these corrections will give everyone the chance to participate in the coming yen moves. We should prepare ourselves for many months of great trading opportunities.

Wishing you all the best of luck with your trading.