Technicals Confront Event Risk For The Fate Of A Clear USDJPY Range

Why Would USDJPY Hold a Range?   ·         Levels to Watch: -Range Top:       91.00 (Pivot, Fib, SMA) -Range Bottom: 87.15 (Double Bottom, Pivot)   ·         There are two key drivers for USDJPY over the coming week: risk sentiment and top tier scheduled event risk. Risk appetite is the more pressing concern for the next 24 to 36 hours as many of the most yen crosses have clawed higher thanks to talk of a massive US stimulus package and the establishment of a ‘bad bank’ that can absorb toxic debt. However, come Friday, the docket will take over with the advanced reading of 4Q GDP.     ·         There are two very different views of USDJPY that can be derived depending on what time frame you are in. Looking at the past four months and beyond, there is a steady down trend (spot is just off of 13-year lows). However, zooming in on the past two months, we have seen congestion develop with a relatively clear head-and-shoulders formation.   Suggested Strategy   ·         Short: Half-sized entry orders will be set at 90.75 – above Wednesday’s high but below resistance.   ·         Stop: An initial stop at 91.75 covers swing highs in the area and potential tails beyond that. To secure profit, move the stop on the second lot to breakeven when the first target hits. ·         Target: The first objective equals risk (100) at 89.75. A second target doubles that at 88.75.

Trading Tip – Technicals make the best case for a USDJPY range. A well-developed head-and-shoulders formation has set a strong level of resistance in a market that generally holds a long-term bearish bias. However, will this pattern hold up when the fundamental tides rise? This is a particularly speculative question and presents a risk that we will want to avoid regardless. As such, our strategy will have to reduce the risk for us. Our set up takes the usual steps towards buffering the potential for loss that is developed through high volatility. We have cut our position size to half the norm to lower our notional risk on the trade. What’s more, we have widened the stop well above the technical ceiling with enough room to account for any significant tails. At the same time, our range is relatively narrow and established on multi-year lows; so we have made our objectives closer than we would have otherwise. Looking beyond technical setups, we also have to take account of the significant presence of both scheduled and unscheduled event risk. As Friday’s 4Q US GDP report represents a top tier market moving candidate, we will close any open orders and tighten stops on live positions before this release.

Event Risk US And Japan

US – The US dollar is torn by itsfundamental roles in the broader market. On the one hand, deep liquidity and a history as the world’s primary reserve currency have imparted the unit with the title of safe haven. However, how influential this driver is a factor of how panicked the markets are. Back in October, investors were concerned only with protecting their capital and only the most liquid markets would do. Today, the market is still cautious but far from panicked; and safety is once again a relative concern with a mind towards potential yield. This allows for greater concern in the more lasting dynamic for any currency – economic health. If the outlook for the economy is dour, there is little expectation of return and capital will naturally seek yield. Come Friday, the market will qualify just how bad a position the US is in with the fourth quarter GDP report. Expected to contract at an annualized 5.5 percent pace, the outlook certainly isn’t good. 

Japan – There is little interest for scheduled event risk when it comes to the Japanese yen. While the health of the economy is tantamount to potential returns, the currency’s title as the market’s primary safe haven more or less immunizes it to all but the most severe shifts in traditional fundamentals. From the coming week’s economic docket, we see little to suggest that scheduled data will make a notable impact on price action – though it will help to define general forecasts for economic growth. One of the key components of the economy, the consumer will see a full checkup with labor earnings figures, household consumption and retail sales figures. Should Japanese citizens boost their savings even further, the Japanese slump will only be prolonged.

Questions? Comments? You can send them to John at jkicklighter@dailyfx.com.