Digging Deep into the Weakening Yen

Currency exchange rates are always relative. To answer the question – “Is the yen stronger or weaker today?” – you first must ask, “compared to what?”

In the Forex world, that comparison is usually against the U.S. dollar. This makes sense as the average daily trade volume in U.S. dollars far exceeds any other currency – it’s the main game in town.

The problem is, when we look at a chart of the USD/JPY pair, which shows how many yen it takes to buy one U.S. dollar, and see it going up, we know the dollar is relatively strengthening against the yen. What we DON’T know is which currency – the dollar or the yen – is really driving the move.

It could be that the dollar is getting especially strong. Or, it could be that the yen is getting especially weak. Either scenario would cause a chart of USD/JPY to trend higher.

We see this conundrum today in two U.S. dollar-based charts. Both the USD/JPY and the USD/CAD have moved higher since last year. So we can see the U.S. dollar has been getting relatively stronger against both currencies.

But that’s the dollar. We want to know if the yen is getting weaker… so we must remove the dollar from the equation. We do that by looking at non-U.S. dollar pairs.
For this exercise, I’ll compare the yen to the Canadian dollar. Here’s a chart of the CAD/JPY (how many yen it takes to buy one Canadian dollar):

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What I see is that, since last October, this currency pair has been trending higher. This indicates that, relatively speaking, the Canadian dollar has been getting stronger against the yen. Or, the yen has been weakening against the Canadian dollar.

Knowing that the U.S. dollar has strengthened against both currencies – the Canadian dollar and the Japanese yen – we can conclude that it is the strongest of the three. The CAD/JPY chart then tells us that the Canadian dollar is stronger than the yen.

Ranking the three currencies this way gives us our answer:

YES – the yen has been weakening over the past several months.

Of course, we aren’t surprised. We expect this trend to continue until the yen has weakened to a point where Japan’s export engine can come back to life. For now, we’re staying on the short side of the yen.

If you haven’t done so already read the Survive & Prosper issue on “The Strong Yen is Killing Japan’s Economy”



Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.