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Risk/Reward of USD/JPY Long Not Appealing as Short EUR/USD

Risk/Reward of USD/JPY Long Not Appealing as Short EUR/USD

Talking Points:

- EUR/USD bear flag may have some juice to be squeezed yet.

- As USD/JPY approaches former TL support, new longs look less appealing.

- See the November forex seasonality report that forecasts US Dollar strength.

Trading, much like in life - whether it's kicking the game winning ball past the keeper in the World Cup Finals or making the perfect fried egg over easy - is about timing. For USD/JPY longs, the time may have run out. The recent leg up higher, which was setting up neatly by last Wednesday only to breakout on Friday's US NFP report, is facing two significant issues going forward, one fundamental and one technical.

Fundamentally, markets already done a great deal in pricing in a prospective Fed rate hike. Coupled with the backdrop of the ECB most likely only unveiling only one of a rate cut or a QE program enhancement, and the central bank stimulus backdrop for the rest of 2015 looks much less sturdy. Accordingly, if markets come to terms with the reality of a Fed rate hike in December, it's possible that risk assets sour; even if the US Dollar benefits from rising short-end yields, USD/JPY may struggle to gain as the Japanese Yen enjoys safe haven-seeking capital flows.

Technically, USD/JPY is now facing significant former support turned resistance: the trendline from the November 2014, April, May, and July 2015 swing lows near ¥124.00. This is the same trendline that capped price on USD/JPY's rebound back on August 28, after the breakdown on August 24.

These factors lead us to the conclusion that, in the near-term, USD/JPY longs may have already seen their best days, and better opportunities may reveal themselves elsewhere. For EUR/USD, the bear flag is still very much in play, and the sustained move below $1.0807 bodes well for continuation into $1.0650.

See the recording of today's trading Q&A webinar for technical considerations in EUR/USD, USD/JPY, GBP/USD, AUD/USD, and the USDOLLAR Index.

Read more: NFP Digestion Has Traders Waiting to Buy the USD Dip

--- Written by Christopher Vecchio, Currency Strategist

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.