King Yen or Emperor with No Clothes

• Posted by Greg Harmon
• on September 27th, 2011

Gold ($GLD) printed a hollow red hammer, potential reversal candle when measured in Sterling ($FXB), Yen ($FXY), Euro ($FXE), Yuan ($CYB), Dollars ($UUP) and against a basket or Emerging Market Currencies ($CEW) Monday. It also finished outside of the lower Bollinger band against each of these currency ETF’s. These patterns need confirmation with a higher close Tuesday to call a reversal in Gold, and early action suggests we may get it. And that would be interesting in itself, but what else does this tell us? Well actually it helps confirm Gold as a currency proxy and also confirms the relative strength and weakness seen in individual currencies and perhaps economies. Let’s look at the two extremes the Wisdom Tree Dreyfus Emerging Currency Fund ($CEW) and the Currency Shares Japanese Yen Trust ($FXY).

Emerging Markets

Emerging Market Currencies ($CEW) have plummeted through the month of September falling nearly 10%. Other than having a Relative Strength Index under 25 it still looks ready for more downside as it settles into the consolidation are from May through June 2010 between 20.10 and 20.80. Measuring Gold ($GLD) against it also shows $GLD holding up very well. It is the only

currency that it is measured in that it is above the 50 day Simple Moving Average (SMA) and is just barely out of the Bollinger bands. The two charts confirm not only the weakness in Emerging Market Currencies directly and against Gold but also the desire to retain exposure to Gold relative to Emerging Markets Currencies. Weak currencies driving towards Gold and holding even in a Gold downturn. This is a message about perceived weakness in Emerging Market Economies.

The Yen

At the other extreme the Currency Shares Japanese Yen Trust, the Yen ($FXY) is showing its strength directly and against Gold ($GLD). With the $FXY bouncing along resistance at 129.40 and ready to burst through higher, the ratio chart of Gold ($GLD) measured in Yen ($FXY) shows the strongest flow from Gold into Yen. The ratio shows it well outside of the Bollinger bands and

sitting just above the 200 day SMA near previous support. The $FXY itself has rising SMA’s and a RSI that has refused to turn bearish. A break higher could be a big indicator of the perceived relative strength of the Japanese Economy.

Will this all reverse soon? The $FXY rejecting at resistance may signal the beginning of a new trend. Or perhaps the Hammer on the ratio chart may confirm it first. But this set of charts is telling us that the world fears emerging economies in favor of the Japanese economy. Not the US Dollar or the Yuan. A breakout higher by the $FXY would re-enforce it. The view from the Pound Sterling, Euro, Yuan and US Dollar all show these currencies in the middle of the road, doing nothing outstanding in terms of Gold. Is the Japanese Economy, crippled by the Nuclear crisis and Tsunamis ready to lead the world?

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