pairs to range trade

A High Risk USDJPY Range Setup Could Play Out Quickly

Thursday, 08 January 2009 23:13:02 GMT  |  John Kicklighter, Currency Strategist

For those that like to live on the edge, the technical draw of USDJPY’s range presents the market with a very clear setup for a short-term play. However, the risk is extremely high as the very attractive technical formation precedes one of the most market-moving indicators the dollar has to offer: non-farm payrolls (NFPs).

Why Would USDJPY Hold Its Range?   ·         Levels to Watch: -Range Top:       94.60 (Fib, Pivot) -Range Bottom: 90.85 (Trend, Fib, Pivot, SMA)   ·         USDJPY will be the epicenter for risk during tomorrow’sUS non-farm payrolls release. With this pair stalled between potential trends and on the edge of a technical breakout, its sensitivity to the data is fully bared upon the world. Not only is the dollar going to reflect the volatility of its top, market-moving economic indicator; but this pair’s clear relation to general risk sentiment can leverage a response to signs of an accelerating recession.   ·         If event risk were not so pressing, the range conditions in USDJPY would be offering incredibly enticing. However, breakout potential is very high, so a trade will be reliant upon the technicals. The pair has recently broken its long-term trend and has developed a bullish channel. It helps that a floor in 90.85 is substantial with a trend, pivot, SMA and Fib.   Suggested Strategy   ·         Long: Half-sized entry orders (or smaller) will be set at 91.25 for an aggressive entry.   ·         Stop: An initial stop at 89.95 is well below trend, but falls short of lower congestion. To secure profit, move the stop on the second lot to breakeven when the first target hits. ·         Target: The first objective equals risk (130) at 92.55. The second target will be 93.95.

Trading Tip – For those that like to live on the edge, the technical draw of USDJPY’s range presents the market with a very clear setup for a short-term play. However, the risk is extremely high as the very attractive technical formation precedes one of the most market-moving indicators the dollar has to offer: non-farm payrolls (NFPs). This potential volatility stored in this event risk is tremendous; and mixed with the breakout potential seen in this pair, it is clear that the suggested strategy is only for those that are very confident taking on the risk. Even for those that are willing to accept the risk, our setup looks to further remove the potential for a loss. As usual, when conditions are not ideal for range trading, we will look to reduce position size to at least half (a quarter would be better) of our normal setup. Further, our stop has been set very wide, but due to constraints on the objective (that would skew risk/reward) we have not put it wide enough to cover the late December congestion. We will cancel any open orders by the close on Friday. There is no reason to exit a trade before the event risk as price action is likely to settle before the release; so this is indirectly a bet that NFPs will either be better than expected or will not surprise to the downside. And, as one more disclaimer: risk adverse traders should not attempt this strategy.

Event Risk US And Japan

US – Scheduled event risk is key to the dollar’s price action tomorrow. The frequent, top market-moving non-farm payrolls release for December is expected to report another 525,000 jobs lost through the end of the year. That would mark a more than a million American’s finding themselves unemployed in just two months time. Such a dramatic increase in joblessness has only been seen a few times in the past 50 years and each time was during a sharp recession. Should we see a payroll cut of this magnitude or greater, it would certainly sink speculation for the US economy recovering from its recession before its major counterparts. Looking beyond next week, event risk will hold relatively steady. The physical trade balance, retail sales, consumer inflation and consumer confidence are all set for release. Each of these indicators will contribute to the focus on growth factors going forward. Scheduled event risk aside, the dollar’s association to risk sentiment could also prove influential in the coming week. Another liquidity scare could send investors back to the dollar; but at the same time, it will have to compete with the yen for speculators’ attention.

Japan – There is very little to worry about from the Japanese economic docket. In fact, the most pressing data scheduled for release are the leading index and Eco Watchers survey; both indicators that have shown little influence on price action in the past. However, the yen won’t go without fundamental impetus. As the most sensitive currency to risk trends, the yen will likely find significant volatility on the US NFPs release, especially if the indicator leads to fear over global growth trends and US expansion at the same time.

Data for January 9 – January 16			Data for January 9 – January 16
Date	New Zealand Economic Data		Date	Japanese Economic Data
Jan 9	Change In Non-Farm Payrolls (NOV)		Jan 9	Leading Index (NOV P)
Jan 13	Trade Balance (NOV)		Jan 13	Eco Watchers Survey: Outlook (DEC)
Jan 14	Retail Sales (DEC)		Jan 14	Domestic CGPI (DEC)
Jan 16	Consumer Price Index (DEC)
Jan 16	U. of Michigan Confidence (JAN P)

 

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

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars