A Long-Term Trend And Level Fundamentals Build USDJPY Range

Why Would USDJPY Hold A Range   ·         Levels to Watch: -Range Top:       91.00 (Trend, SMA, Pivot, Fib) -Range Bottom: 87.15 (Swing Low, Pivot)   ·         Risk sentiment has been side-lined – perhaps permanently by the drop in year-end liquidity. Through November and December, the dramatic shifts in investor sentiment was stabilizing after a panic state swept over the markets. Currently, liquidity is further dampening volatility. However, with similar lending rates, growth prospects and safe haven statuses, the even ground that the dollar and yen will last through further swells in risk.   ·         Through the short-term, USDJPY has certainly seen a turn through congestion; but long-term the pair is in a very steady downtrend. However, even in this general drift, the market has maintained a semblance of congestion. With a multi-month trendline, 20-day SMA, notable pivot and minor Fibs at 91, there is plenty of technical resistance.   Suggested Strategy   ·         Long: Entry orders will be set at 90.75 which is well below the trend but is still aggressive.   ·         Stop: An initial stop at 91.55 covers the falling trend, but is still a reasonable risk. To secure profit, move the stop on the second lot to breakeven when the first target hits. ·         Target: The first objective equals risk (80) at 89.95. The second target will be 88.75.

Trading Tip – There is considerable volatility across the market, but those pairs that were the most active in past months now seem to hold the greatest stability. Point-in-case, USDJPY’s congestion has fit into a broad technical trend; and fundamental shifts underlying the market may keep the pair in a manageable range through the near future. The most pressing influence on this pair remains the back-and-forth in risk sentiment. Through the financial crunch, this pair has been a target of massive carry unwinding and natural deleveraging through repatriation. However, in the absence of sheer panic, these currencies have very similar attributes. Both have interest rates near zero, very dour forecasts for growth and each is a proven safe haven for capital. Nonetheless, unusual things can happen during periods of low liquidity and when policy officials the world over are trying to prop up failing economies as well as exchange rates. Therefore, our position looks to go with the larger trend, keeps a relatively tight stop and retains reasonable objectives. To further curb risk, we will cancel any open orders by Friday to avoid a jump in volatility that may accompany the return of liquidity next week.

Event Risk US And Japan

US – For most of the majors, the US dollar’s future is still wrapped up in its position as a safe haven for the currency market. However, this is less of an issue when compared to the Japanese yen – the funding currency of the carry trade for more than a decade. Alternatively, economic trends are taking on a greater role in fundamental price action. With interest rates near zero for the US (and many other G10 rates expected to follow), concerns over the balance between risk and return now must rest on the very uncertain outlook for when speculation and interest rates will regain ground later in 2009. This means that all leading economic data could play a role in guiding growth expectations – and thereby the position of the US against its many counterparts. Looking at the calendar for the coming week, we could see a significant shift in forecasts. Timely readings on manufacturing and service activity, construction spending, housing sales and a recount of the FOMC’s last rate decision could certainly change expectations.

Japan – Like the US dollar, the Japanese yen will continue to experience a heightened sensitivity to the trends in risk appetite. For the current week however, the market is too thin to see any substantial swells in investor sentiment. However, that does not mean a major unexpected event could not alter the dynamics behind this important market theme. Tensions are rising in the Middle East and the US has stepped up its bailout efforts recently (GMAC), so there is certainly potential. 

Questions? Comments? Send them to John at jkicklighter@dailyfx.com.