Volatility across the FX-spectrum (and other asset classes too) has declined sharply, with EUR/JPY as a prime example of the crush in volatility. Current conditions favor low-volatility strategies, but that won’t last forever and a material breakout could be nearing…
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EUR/JPY 1-month implied volatility is at 5.85%, the lowest level since the summer of 2014. The low-volatility environment has created an impressively persistent range lasting three months and counting. We’re seeing a push to the upper portion of the range at this time. But given the lull in markets which could dominate trade through the end of the year a little more time may elapse before enough market participation comes in to push euro-yen out of the range. As long as it persists it favors fading top and bottom-side levels.
Once a breakout develops, and one eventually will (ranges don’t last forever), we could see a good amount of momentum. The broader trend since earlier in the year favors a top-side breakout, but we can’t yet rule out a breakdown. Instead of predicting when the range will end and which direction it will be resolved, a reactionary approach will be taken.
The range is about 300 pips in height, which implies a measured move of that amount. But given the length of time EUR/JPY has been coiling and how JPY-pairs can garner momentum once they get rolling, it seems likely the move could be significantly larger. On the top-side there are resistance levels from 2015 from around 13700 up to 14100 to watch. On the downside, ~12900 down to ~12550.
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EUR/JPY: Daily
Tactical Approach:
- For now, trading conditions continue to favor fading price swings into support/resistance
- That could change today, next week, or several weeks from now (thinking on this end is by the first week or two of January)
- A strong daily close above resistance (13450) brings long-trades into play (13700+ as targeted resistance)
- A strong daily close below support (13123) favors shorting (~12800- as targeted support)
---Written by Paul Robinson, Market Analyst
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