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Japanese Volatility Settles but Risk Aversion Digs In

Japanese Volatility Settles but Risk Aversion Digs In

2011-03-16 19:47:00
John Kicklighter, Chief Currency Strategist

This is a quickly evolving market; and we need to keep a close eye on the broader market themes just as surely as we have to track individual trade setups. The bigger theme today is that the volatility that followed the Japanese market collapse has eased - though the drivers behind this sharp move are still in place. On the other hand, risk appetite seems to have also solidified despite the correction from the Nikkei 225. Having long-awaited a necessary correction in over-inflated sentiment; I see the fundamental backdrop for such continuation. That said, our traditional lines of safe haven and risky currency are blurring. These are general correlations - not gauranteed roles; so we need to stay on our toes.


For the outlook on risk aversion, my favored position is the AUDUSD short I already have on the books. Having already hit its first target at 0.9790; I'm now looking to see how far this reversal can go - and I think it has a lot of room to work with. Another Aussie-short position that has far less dependence on volatile swings in sentiment is a reduced, long GBPAUD position I have taken from 1.6320. With a 235-point stop and first taget, the smaller size is essential; but so too is this wide buffer to account for its volatility. I think we have a favorable interest rate, risk and regional bias. And, as a pure alternative scenario, I have also taken a very small AUDCHF long from 0.8925 with a 200-point stop and initial target on the basis that this pair has moved too quickly, will show some resilience with a long-term Fib and double bottom in the area, and a disappointment from the SNB can trigger a correction in the franc.


My long-term and very low leverage USDJPY long has to be reviewed again with our nudging post-float record highs. I have actually added a small amount here (which still keeps this position far smaller than my average trade) - and this is for a view that underlying fundamentals will balance out after risk trends stabalize.


Looking for other trade potentials, I see opportunities for various scenarios. I will take a small NZDJPY short should it close below its range low (58.75) on the basis of risk trends and curbed rate expectations. A dollar long opportunity is very real with risk trends keeping elevated and undermining the European-area's financial and economic health. I like GBPUSD breaking the neckline of its head-and-shoulders pattern at 1.5975; and EURUSD would be a good short with a close below 1.3850. Elsewhere, a multi-month descending trend channel could offer a break or reversal on USDCAD at 0.9965; AUDCAD is now hovering at a 0.97 long-term neckline for a H&S pattern; and NZDUSD could have offered a test of former support as new resistance at 0.7325. There are others; but I'll stick with that for now.

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