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Japanese Yen: Guesswork Vs. Forecasting
The opposite of wild guesses is a certainty. Somewhere in-between is a forecast...
You may have heard that this week, the Japanese yen hit a 13-year high against the U.S. dollar. As The Financial Times put it in a December 17 article,
The yen appreciated to its strongest level against the dollar in 13 years as the US Federal Reserve unexpectedly cut interest rates from 1 per cent to a range of 0 to 0.25 per cent. The yen’s reached Y88.24 to the dollar by mid-afternoon in Tokyo. [Y87.15 on Dec. 17 – Ed.] The currency has gained more than a quarter in value against the dollar so far this year.
To currency traders, this pair is known as the USD/JPY. So, why is the yen gaining? Apparently, "It gained a reputation as a safe-haven currency during turbulent times…" Now that we find ourselves in the middle of a financial crisis, that's a perfectly good explanation – in retrospect. But could you have predicted the yen's current strength six months ago? A year ago?
It depends on how you would have gone about coming up with that prediction. Was there anything in the yen's "fundamentals" six-twelve months ago that would have suggested its current strength? Unless the memory fails me, no. So, a year ago, stating that the yen would soon gain "a reputation as a safe-haven currency" likely would have been nothing but a wild guess.
The opposite of wild guesses is a certainty. Somewhere in-between is a forecast – still a guess, because no one knows the future – but an educated guess, nevertheless. (Maybe even a highly educated one.) Thus, a forecast is not based on guesswork; in the two examples you're about to see, forecasts were based on years of experience and concrete technical evidence that the yen was offering earlier this year.
Here is a forecast for the USD/JPY from Elliott Wave International's monthly Global Market Perspective (GMP) – as published on January 4, 2008, almost exactly a year ago:
Forecast, January 2008 GMP (excerpt): "We can anticipate that the yen will … resume its larger bull trend against the dollar, evidenced by $JPY falling to a new low."
What about six months ago? At the time, the USD was at its weakest, and all eyes were fixed on the "unraveling demise of the dollar." (A problem the buck has dealt with remarkably well, as we all know.) Here is the USD/JPY chart and forecast from the June 2008 GMP (published May 30):
Forecast, June 2008 GMP (excerpt): "A decline below 102.50 would offer the first evidence of a bearish reversal… The next step would be a move below 100. The monthly chart supports our bearish outlook."
And what about now? One analyst quoted in the December 17 FT article thinks that "the yen’s rally might be nearing its end," because “We are running into a point where it’s difficult to validate the yen’s strength on its fundamentals.”
Well, if the events in the currencies markets over he past year have taught us anything, it is that "fundamentals" are poor predictors of trends. Forex markets (like any other markets) are not driven solely by the "if, then" type of logical reasoning, but also by expectations, perceptions and hunches. And those are colored by only one thing: how bullish or bearish currency traders feel – i.e., their emotions.
This emotional balance (and imbalance) in the markets is exactly what Elliott wave analysis studies and forecasts. "Fundamentals" or not, our forecast for the USD/JPY remains much more dire than the conventional economic analysis may suggest. Get the details now in the current, December Global Market Perspective.