Trading is off to a rough start in the new year. China kicked off the fireworks for 2016 with a trading halt. From Bloomberg:
“The worst-ever start to a year for Chinese shares triggered a trading halt in more than $7 trillion of equities, futures and options, putting the nation’s new market circuit breakers to the test on their first day.
Trading was halted at about 1:34 p.m. local time on Monday after the CSI 300 Index dropped 7 percent, according to data compiled by Bloomberg. An earlier 15-minute suspension at the 5 percent level failed to stop the retreat, with shares extending losses as soon as the market re-opened…
The world’s second-largest stock market began the year on a down note after data showed manufacturing contracted for a fifth straight month and investors anticipated the end of a ban on share sales by major stakeholders at the end of this week…
The Shanghai Composite Index lost 6.9 percent.”
The Shanghai Composite has been relatively quiet for months now. The chart below is updated through the end of 2015. It shows how the 200-day moving average (DMA) has loomed over a gentle and steady recovery from the August crash lows for SSEC.
Source: FreeStockCharts.com
I mention the Chinese trading action as a backdrop to movements in the currency market. The Japanese yen (FXY) is an early beneficiary of this sudden wake-up call. The yen is a traditional “safe haven” currency for panicked currency traders and hedgers. So the yen’s strength in the context of a massive sell-off in China is a big sign flashing red for 2016. The yen’s surge is an immediate challenge to my recent claim that the U.S. dollar could continue to occupy center stage for the foreseeable future. In my earlier piece I made a quick reference to one extreme analyst who expects USD/JPY to return to 100 this year. Looks like USD/JPY is off to a decent start for that target…
As I noted earlier, if the yen cracks presumed support shown above, I will take the 100 target a lot more seriously.
In the meantime, the yen is marking some important milestones and signals against other major currencies. All these signals point to the higher potential of major changes underway.
First and foremost, the yen has finally completed a roundtrip against the euro (FXE). It took a month for the yen to reverse the massive gain on EUR/JPY from the “Draghi Drubbing.”
The British pound (FXB) has experienced a bout of weakness that accelerated in December. As a result, GBP/JPY has sharply slid over the past month. Such a well-defined trading channel is a treasure to find. I regret that I am only now catching on (at the time of writing, I just closed out my first trade on this channel).
The Australian dollar (FXA) versus the Japanese yen serves as an important indicator of market sentiment. After failing to break through resistance at its 200DMA, AUD/JPY next broke down below 50DMA support. The last two trading days have confirmed the 50DMA is now firm resistance. AUD/JPY held up admirably just long enough to help support last month’s Santa Claus rally.
The Japanese yen is even beating out the Swiss franc (FXF). The franc has also served as a traditional safe haven currency. That status was tarnished after the Swiss National Bank (SNB) spectacularly capitulated on its floor against the euro almost a year ago.
Source for all charts: FreeStockCharts.com
Markets are moving fast. Even as I quickly finish this piece, a strong relief rally against the Japanese yen is already underway. It is strong enough to setup my next fade on GBP/JPY. Traders of forex and stocks will do very well to pay heed to the message in the Japanese yen. It is flashing red for 2016 and making me inclined to bias bearish until AUD/JPY can at least recover its large losses from the last two trading days.
Be careful out there!
Full disclosure: long and short various currencies against the Japanese yen