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Japanese Yen May Have Set Bottom - Here are Our Trade Setups

By , Quantitative Strategist
13 January 2014 15:20 GMT

- Japanese Yen the top mover and our top forex trading focus this week

-The sentiment-based Momentum2 strategy has bought heavily into Yen strength

- Our Senior Currency Strategist highlights critical USDJPY support

The Japanese Yen has started the week sharply higher versus the British Pound, Euro, and US Dollar. Why might it continue higher, and how can we trade it?

Last week we highlighted several key factors that left us in favor of further Japanese Yen strength. Namely: a build in Forex volatility prices/expectations, extremely one-sided JPY positioning, and the potential for a break of Yen resistance (USDJPY, EURJPY, GBPJPY support) warned of a potentially significant rally.

We’ve now seen the USDJPY fall below important congestion support, and our Senior Currency Strategist believes that the Japanese Yen could have set a significant low as it reverses higher.

The obvious question is how do we trade it? And just as significantly, what would negate our calls for further Japanese Yen strength?

Our purely forex sentiment-based Momentum2 trading strategy has had a busy several days as it is now short USDJPY, EURJPY, GBPJPY, and CHFJPY. We like said positions as long as USDJPY continues to hold below ¥103.30 and xxx/JPY pairs continue to make a series of lower highs and lower lows.

The major risk to our Japanese Yen forecast is fairly straightforward: the USDJPY remains strongly correlated to the US S&P 500 and broader ‘risk’. Stocks have started the week flat, and we might need to see the S&P and the Japanese Nikkei 225 move considerably lower to help confirm the JPY reversal.

Take a look at full strategy preferences below and sign up for future e-mail updates via my distribution list.

Forex Volatility Prices Roughly Flat, but JPY Pairs Likely Big Movers

forex_japanese_yen_our_top_trade_in_week_ahead_body_Picture_1.png, Japanese Yen May Have Set Bottom - Here are Our Trade Setups

Source: OTC FX Options Prices from Bloomberg; DailyFX Calculations

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_japanese_yen_our_top_trade_in_week_ahead_body_Picture_2.png, Japanese Yen May Have Set Bottom - Here are Our Trade Setupsforex_japanese_yen_our_top_trade_in_week_ahead_body_Picture_3.png, Japanese Yen May Have Set Bottom - Here are Our Trade Setups

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--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

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Definitions

Volatility Percentile – The higher the number, the more likely we are to see strong movements in price. This number tells us where current implied volatility levels stand in relation to the past 90 days of trading. We have found that implied volatilities tend to remain very high or very low for extended periods of time. As such, it is helpful to know where the current implied volatility level stands in relation to its medium-term range.

Trend – This indicator measures trend intensity by telling us where price stands in relation to its 90 trading-day range. A very low number tells us that price is currently at or near 90-day lows, while a higher number tells us that we are near the highs. A value at or near 50 percent tells us that we are at the middle of the currency pair’s 90-day range.

Range High – 90-day closing high.

Range Low – 90-day closing low.

Last – Current market price.

Bias – Based on the above criteria, we assign the more likely profitable strategy for any given currency pair. A highly volatile currency pair (Volatility Percentile very high) suggests that we should look to use Breakout strategies. More moderate volatility levels and strong Trend values make Momentum trades more attractive, while the lowest Vol Percentile and Trend indicator figures make Range Trading the more attractive strategy.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES IS MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION.

OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as general market commentary, and does not constitute investment advice. The FXCM group will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance contained in the trading signals, or in any accompanying chart analyses.

13 January 2014 15:20 GMT