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GBPUSD a Good Alternative to Gearing Risk Trends with USDJPY

GBPUSD a Good Alternative to Gearing Risk Trends with USDJPY

2011-03-16 03:09:00
John Kicklighter, Chief Currency Strategist
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I'm not writing off USDJPY as a trade opportunity. If we come to a clear view on risk appetite trends in general or the situation in Japan specifically; then this particular pair is a good opportunity for either a break or reversal from 80.50. However, speculating on the direction of the underlying market trend, which factor is the primary driver and how the market will act specifically to developments brings three big variables into the picture - and all three are difficult to gauge. Under such circumstances our probability of sucess is naturally weighed down.

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At the moment, most of the potential in trading FX or any other asset class is in risk appetite trends. After the dramatic slump in Tuesday's early Asian trading, we saw the declines of subsequent markets post progressively shallower declines. This suggests to many that risk aversion has run is course; but to me, it just indicates that volatility is settling - not that the bearish bias has passed. I think the Japanese financial shock is just another step in the gradual deterioration in the fundamental picture (following other natural disasters, the unrest in the Middle East with its surge in energy prices, the effort by China to slow its rapid pace of growth, the revival of European financial concerns and the threat of the end to stimulus among other things). What remains to be seen is whether this is the definitive catalyst to finally unravel the persistant bullish convictions of the crowd.

...

I think that there is a very good probability that just such a shift is occuring; and that is the basis of the AUDUSD short I entered from 0.9950. With a 65 point stop, equivalent first target and as yet reduced position size, I can have room to build as my conviction grows. In the meantime, the volatility of the opening 48 hours of this week has cleared may, similar tentative trades I had on. Having taken a first target on an early short-term USDJPY bounce from 81.50, my second effort was stopped out on Monday's incredible volatility. My effort to play the 1.3865 break was cut early Monday after the market reacted to the EU summit from after Friday's close. The EURNZD short I had hit my stop and offset the gains I made on the GBPNZD short. And, USDCHF was cut off after pushing to new record lows.

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We can only position for what can be reasonably expected; but from that range of exposure, I leveraged my risk by following one view on risk - negative. I still see tremendous opportunity in risk trends; and I will position for another go at it; but there will certainly be false starts along the way. For a specific risk exposure, I'll keep an eye on EURJPY with a potential break below 112, NZDJPY below 58.75, I'm considering a shrot on NZDUSD as it retests former support as new resistance around 0.7335, GBPAUD should it break above 1.62 and perhaps even USDJPY and EURUSD. A more balanced risk approach is waiting for a GBPUSD to break below 1.5975. As a big head-and-shoulders pattern, susceptible to fading rate expectations and having an inclination for risk trends; the probabilities are skewed.

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