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Yen Intervention will Fight Carry Unwinding and There May be Trades in Between

Yen Intervention will Fight Carry Unwinding and There May be Trades in Between

2011-03-18 01:27:00
John Kicklighter, Chief Currency Strategist

We were dealt another shock to risk appetite trends through the Japanese yen. The only difference is that this time, the jolt was positive for the bullish crowd. A commitment of coordinted intervention by the G7 central banks brings a lot of firepower towards stabalizing exchange rates that have been roiled by the unfortunate circumstances that have befallen the Japanese people, economy and financial markets. The overall impact that this fight will have on the yen specifically though is questionable. Since they are inherently fighting carrying unwinding, they will not win if risk aversion keeps pace. And, as for the risk appetite implications, stabalizing USDJPY exhchange rates hardly bores down to the core of investors concerns.


With the yen in mind specifically, my very long-term and low leverage USDJPY returned to the black; but this is a mere bump in the road - and a temporary one at that. New to the mix is a short CADJPY. This is a reduced size due to the high risk of fading a market destortion. With an entry at 0.8255 and 100 point buffer (stop and target) on each side, it can make its decision for direction quickly. Other yen-based potential includes CHFJPY at the top of its multi-month rising channel at 89.70 and GBPJPY testing former range support as new resistance at 131.50/25; but that would essentially be leveraging up on the same trade as these pairs are highly correlated. That said, the remaining half of my NZDJPY short (the first hit its target yesterday) was trailed out at breakeven; and I am still looking out at the rally potential should EURJPY advance above 115/116.


From the risk side of the equation, there is where most I am seeing the most impact from the intervention announcement. My short AUDUSD, short AUDCAD and long GBPAUD have all retraced gains after coming close to first targets. They still have great potential; but it will take longer to get there. I'm also concerned that these are very similar pairs, though my leverage is not excessive between them. Another new setup is a short-term GBPUSD short. I'm still waiting for that big head-and-shoulders pattern to break below 1.5965; but in the meantime, I can play a reversal on the short-term, intrday wedge formation from 1.6145. A 60 point target and stop keep risk low and timing reasonable. I'm encouraged that its gains were very limited after the intervention announcement while EURUSD pushed forward.


There are other potential trades out there; but we'll discuss those when they are closer to fundamental and technical entry.

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