Renowned bear and Societe Generale strategist Albert Edwards usually looks at fundamental valuations and big macro trends, but in a recent not he shows that he’s just as willing to turn to technical analysis in his search for bad news. Right now he’s concerned that a weakening Yen, having just fallen below a fifteen-year uptrend, could be the catalyst for bigger global problems.
“A fragile Chinese economy could be pushed over the edge by a further yen devaluation – in many ways a replay of the Asian crisis of 1997,” says Edwards. “And just as the Chinese real economy data has taken a turn for the worse in August, the yen has slipped below a key 15-year support level against the dollar. This is probably the most important chart investors should focus on. The next phase of global currency wars may have begun.”
Weaker yen threatens both China and the West, says Edwards
The first complaint you might be making is that what we’re really seeing is a case of dollar strength, not yen weakness, as evidenced by the US dollar index starting to push against multi-decade resistance. But Edwards argues that dollar strength is only part of the story because the yen is also falling against the euro. A falling yen could pull down other Asian currencies, strengthening the renminbi in response and making Chinese policymakers job more difficult as they try to manage the country’s decelerating economy.
Edwards also argues that a weakening yen would increase deflationary pressure in the US and the EU, where growth is already so weak that even a small, unexpected shock could be enough to send them back into recession.
Forex technical analysis can be a self-fulfilling prophecy
Edwards also argues that technical analysis is especially important in forex simply because that’s the approach most forex traders are going to take anyways.
“The very fact that the markets contain so many followers of technical analysis means that the soothsaying of chartists can actually be self-fulfilling,” he writes. “Nowhere is this more true than in the world of foreign exchange.”
And since forex traders thrive on volatility, the current trading environment has been incredibly frustrating for most of them and the possibility of a big shift in the behavior of a major currency, and all the dislocations that may come with it, won’t escape their notice.