pairs to range trade

USDJPY Finds a Modest Buffer To Rising Risk Trends

Monday, 22 June 2009 19:47:16 GMT  |  John Kicklighter, Currency Strategist

Risk appetite is as difficult to gauge now as it was through last week’s heightened volatility founded through this theme. However, there has been a notable shift towards risk aversion noted in the US dollar and Japanese yen-based pairs with greater yield differentials.

Why Would USDJPY Hold a Range? •       Levels to Watch:         -Range Top:       98.85 (Trend, Fib)         -Range Bottom: 95.50 (Trend, Fib, Pivot) •      The yen and dollar crosses are primarily a reflection of risk appetite.         When looking at USDJPY, however, the story changes a little.         Undoubtedly, this pair will take its direction from shifts in sentiment         that will catalyze the individual currencies against more clearly        defined risk setups. However, when valuing one against the other,         the risk factor is distorted. Extremes, long-term growth forecasts and        financial stability are all more direct factors with this pair. •     There is a lot congestion setup for USDJPY. Starting from the larger        time frame, there is an asymmetrical triangle pattern that currently       defines support around 95.50. Moving to more recent price action, we       are in a zone that is now considered a failed head-and-shoulders        pattern. Finally, there is plenty of minor indicators to work with in       calling support. Suggested Strategy •     Long: Entry orders will be placed at 95.85, which is well within        today’s low yet at a range extreme. •    Stop: An initial stop of 95.25 is very tight as a push at this level       could quickly turn to a break. To secure profit, move the stop on the       second lot to breakeven when the first target hits. •    Target: The first objective equals risk (60) at 96.45 and the second       target will be 97.05.

Trading Tip – Risk appetite is as difficult to gauge now as it was through last week’s heightened volatility founded through this theme.  However, there has been a notable shift towards risk aversion noted in the US dollar and Japanese yen-based pairs with greater yield differentials. USDJPY is standing on the edge of its own breakout; but fundamental and technical considerations may make it a tough level to breach. The more important consideration here is fundamental. We have already seen risky assets across the board tumble and align themselves for potentially significant breakdowns. However, this major is somewhat buffered to simple peaks and crests in optimism. Either this fundamental theme will have to see a dramatic and all-encompassing shift or ancillary factors (growth, trade, interest rates) will have to determine a break. Should such a remarkable shift not be in store, it would work in favor of our position as it will merely move back to the center of its range. Assessing the unique risk to this pair, we have a pending NZDJPY setup from last week that would increase our exposure. On the other hand, our prospective risk on this position is low. Our stop is set purposely tight as a break could catalyze quickly. Additionally, our targets are set close so we can make both targets quickly. We will cancel all open orders by Wednesday.

Event Risk for US and Japan

US – There is plenty of scheduled fundamental event risk for the US dollar over the coming week; but the real question is whether it is market moving or not. Monthly economic data will have a hand in adjusting forecast for the general pace of expansion going forward; but market participants have seemed to come to an equilibrium on their outlooks given the plentiful forecasts from policy officials and aggressive speculation through securities appreciation. From the docket, the existing and new home sales data will offer better analysis for the housing sector; durable goods orders will gauge business health; and personal spending covers the vital consumer. It may be the FOMC rate decision that could be the real market mover however. Though the board is largely expected to hold the benchmark unchanged at 0.25 percent; there have been rumors that policy officials are concerned about the market’s pricing in near-term rate cuts and that they may use this forum to squash this speculation. Outside of the standard fundamental crawl, the dollar will measure its correlation to risk trends. The relative pace of economic recovery, deep liquidity and commitment to stability stand large in the US. 

Japan – There is an unusually full event calendar for the week ahead in Japan. Among the top level indicators scheduled throughout the period, we have trade figures, inflation, retail sales and industrial production and house hold spending. These figures will offer a timely and broad view of the same data the BoJ is monitoring for its policy decision and economic forecasts. Perhaps the biggest market mover is just beyond the scope of one week. The Tankan survey is considered one of the most accurate business sentiment indicators for the largely export-based economies. Aside from this data, yen traders will have to keep a constant watch over risk trends. There are no definitive releases that can promise volatility; but this underlying theme is ever present and constantly in flux.

Data for June 23 – June 30			Data for June 23 - June 30
Date (GMT)	US Economic Data		Date (GMT)	Japan Economic Data
Jun 23	Existing Home Sales (MAY)		Jun 23	Merchandise Trade Balance (MAY)
Jun 24	Durable Goods Orders (MAY)		Jun 25	All Industrial Activity Index (APR)
Jun 25	FOMC Rate decision		Jun 28	Industrial Production (MAY P)
Jun 26	Personal Spending (MAY)		May 29	Household Spending (MAY)

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