Currency Shares Japanese Yen Trust (NYSE:FXY) is declining sharply following weaker than expected trade data released by the government on Monday. The increase in Japan’s trade deficit coincides with a momentum sell signal that will keep the currency on the defensive. This ETF is the most liquid of the Japanese yen ETFs, and follows the movements of the exchange rate between the Japanese Yen versus the US dollar.
Japan reported a record large trade deficit in March of nearly 1.45 trillion yen, which was about 40% larger than economists had expected. Many consider a trade deficit to be negative for an economy as well as a currency as a nation that consistently runs a deficit is borrowing from abroad and selling off domestic asset to finance purchases of goods and services. For example, Japan would sell yen to purchase items outside of Japan.
The trade deficit reflects a slump in exports, which only climbed 1.8% year over year. Imports were up more than expected. The 18.1% increase from a year ago was twice the rise in February and above the 16.2% consensus forecast by economists.
On April 24, Japan is scheduled to report its March inflation figures. A lower than expected Consumer Price Index could force the Bank of Japan to generate additional monetary stimulus to avoid deflation.
The most interesting readings will focus on the Tokyo’s Consumer Price Index which will include the new sales tax increase. The headline rate is expected to surge to 3.1% from 1.3%. Since economists expect a relatively high inflation figure, there is the risk of a disappointing rise in the CPI which could further erode the value of the yen.
Momentum on FXY has turned negative as the MACD (moving average convergence divergence) index generated a sell signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses below the 9-day moving average of the spread. The MACD index moved from positive to negative territory which confirms the MACD crossover sell signal.
The 5-day moving average is poised to cross below the 20-day moving average. When this occurs, a short term down trend is generally considered in place.
FXY Support and Resistance
The next level of target support for the FXY is seen near an upward sloping trend line that connects the low made in December of 2013 and the low made in early April. The slope of this trend line comes in near $94 per share.
Resistance is seen near a downward sloping trend line that connects the high in February to the highs in March in creates a slope that comes in near $94.25.
The weekly chart of FXY shows that the ETF is currently in a prolonged downtrend that began in the summer of 2012. Target resistance is $90 per share, which coincides with the lows made during October of 2008. Additionally, a weekly channel band has been created, and the lower end of the channel coincides with the low created during October 2008.
Trading the FXY
Investors looking to take advantage of the downward momentum in FXY could short the ETF near the 20-day moving average at $95.20. I recommend using the downward sloping trend line, near $96.50, as a level to place at stop.
Investors could consider taking profits near $90.00, which coincides with the October 2008 lows. That would translate into a profit of 5%. Longer term investor could consider riding the trend down to the lows made in June of 2007 near $81. This would translate into a profit of 15%.
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