Trading the Japanese Yen as it Nears ¥100
Article Summary: The forex market continues to move at two speeds: the Japanese Yen and everything else. Here’s how we favor trading big JPY moves in the potentially pivotal week ahead.
DailyFX PLUS System Trading Signals – An “all-clear” from the closely-watched G20 meeting gave speculators all of the reason they needed to continue selling the Japanese Yen, and elevated forex volatility prices suggest we may continue to see big JPY moves into the week ahead.
Our volatility-friendly Breakout2 strategy has just been stopped out of JPY-short positions against the Euro (EURJPY long), but we believe that the system may nonetheless do well trading Yen pairs through the foreseeable future. Get a comprehensive rundown of our strategy outlook via today’s archived webinar.
A closer look at relative volatility expectations (chart below) illustrates the point: Japanese Yen volatility expectations are at their highest since 2011, while US Dollar volatility prices have fallen near year-to-date lows.
DailyFX Forex Volatility Index Versus JPY Volatility Index (JPYVIX1M) and Non-JPY Volatility (NonJPYVIX1M)
Source: OTC FX Options Prices from Bloomberg, DailyFX Calculations
Last week we wrote that the FX market was moving at two speeds: the Japanese Yen and everything else. And indeed that remains the case through present day; the fact that the USDJPY is making another run at the critical ¥100 mark suggests this could be the week it finally breaks.
Past performance is absolutely NOT indicative of future results, but high volatility expectations for JPY pairs tends to coincide with outperformance in our breakout-based strategy. We were reminded of that fact in particular last week: after an amazing run with Japanese Yen pairs, our sentiment-based trading strategies gave back some gains on choppy JPY price action. The probability for big moves emphasizes that leverage should be lower than normal on big JPY moves.
View the table below to see our strategy preferences broken down by currency pair.
DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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Volatility Percentile – The higher the number, the more likely we are to see strong movements in price. This number tells us where current implied volatility levels stand in relation to the past 90 days of trading. We have found that implied volatilities tend to remain very high or very low for extended periods of time. As such, it is helpful to know where the current implied volatility level stands in relation to its medium-term range.
Trend – This indicator measures trend intensity by telling us where price stands in relation to its 90 trading-day range. A very low number tells us that price is currently at or near 90-day lows, while a higher number tells us that we are near the highs. A value at or near 50 percent tells us that we are at the middle of the currency pair’s 90-day range.
Range High – 90-day closing high.
Range Low – 90-day closing low.
Last – Current market price.
Bias – Based on the above criteria, we assign the more likely profitable strategy for any given currency pair. A highly volatile currency pair (Volatility Percentile very high) suggests that we should look to use Breakout strategies. More moderate volatility levels and strong Trend values make Momentum trades more attractive, while the lowest Vol Percentile and Trend indicator figures make Range Trading the more attractive strategy.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES IS MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION.
OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as general market commentary, and does not constitute investment advice. The FXCM group will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance contained in the trading signals, or in any accompanying chart analyses.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.