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Conviction in Risk Amid High Volatility

Conviction in Risk Amid High Volatility

2016-02-25 20:13:00
John Kicklighter, Chief Currency Strategist
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Conditions are extraordinarily volatile while at the same time, we find underlying themes gain serious traction in the markets. That makes for dichotomous trading.

I remain short USDJPY on the perspective of a bigger picture shift in risk aversion that will pull down the Yen crosses the board given the years of low-return carry trade that had been built up behind efforts to take advantage of liberal central banks and a general sense of complacency.

I am well in the money after an entry just below 116, but this is not a short-term setup with an intention of hitting a target equivalent to the risk (that long passed). This is thematic, and I believe there is more to the theme. This will take longer to unfold and I'm willing to build in this pair specifically if we rebound to 115 and it proves to stall again for the next phase down.

In contrast to adding to the same pair though, I like diversifying to the theme in EURJPY and NZDJPY. The former dove in reponse to the Brexit news, but it can be the same hold at former support-style candidate. If it is rejected from 125/126 and risk aversion kicks back up, I'll consider EURJPY an opportunity. As for NZDJPY, a multi-year rising channel floor is at 74.50, but I may consider it a break on a close below 74 or 73.50.

Given the conditions, I am also looking at short-term candidates that more suit our market circumstances. AUDUSD breaking from its tight 0.7250-0.7150 range or NZDUSD 0.6750-0.6550 are appealing, but action depends on on the catalyst. Indecision in retail positioning for these pairs speaks to breakout risk. For EURUSD, a similar range has arisen between 1.1050 and 1.0950, but momentum will be difficult to muster given the competing fundamental themes here.

I'll keep tabs on my trading interest in the daily Trading Videos.

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