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Short USD/JPY, Long USD/CNH: Q2 Top Trading Opportunities

Short USD/JPY, Long USD/CNH: Q2 Top Trading Opportunities

John Kicklighter, Chief Strategist

Short USD/JPY on Range Hold, Long USD/CNH as Trade Wars Return

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Through the opening quarter of the year, I was expecting a near certainty of stimulus and the progress towards vaccinating the world to keep a tail wind at risk trends’ back. That said, ‘risk on’ is long-in-the-tooth with greater scrutiny encouraged with each step higher the benchmarks take. My preference thereby fell to two Yen crosses. USD/JPY has the benefit of offsetting risk through two havens and GBP/JPY the added benefit of the Sterling finding normalcy post-EU split. Yet, what was truly appealing was the technical view with a 7-year range for the former and critical break potential for the latter. Both managed to fulfill the initial potential, but subsequent follow through seems a lower probability affair given it would insinuate – perhaps necessitate – full blown risk appetite.

Chart of USD/JPY with 4-Week Rate of Change (Weekly)

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Chart prepared by John Kicklighter, created with IG Platform

I do not operate on an expectation of certainty in my views, and that means I am not particularly fond of picking tops and bottoms. Yet, markets turn and opportunities often arise from such situations. So, taking that big picture USD/JPY range, I’m watching to see if resistance stands in the 109-110 zone. It is possible that we charge beyond that figure only to see the pair falter on fundamental terms or simply a lack of technical conviction in the breakout – a difficult sentiment to muster. The consideration for me is the lack of certainty within markets that the Fed has to abandon its extreme accommodation given their paranoia of creating a ripple of panic unless it is absolutely necessary. A favorable factor in this pair is that if risk aversion sidles in, it would likely see USD/JPY decline. I am looking for an interim technical break below the short-term congestion low (ie 108.50) and subsequent milestones to bolster conviction. The full extent of the range runs down to 102, but it would be greedy to project all the way down to the opposite extreme.

Chart of USDCNH (Daily)

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Chart prepared by John Kicklighter, created with IG Platform

It’s hard to escape ‘risk trends’ but there are a few alternatives. One exchange rate that is catching my attention heading into the second quarter is USD/CNH. Many will eschew this cross as they feel it does not abide by natural fundamental and/or technical motivations. I wouldn’t argue against those views, but rather prefer to potentially exploit this anomaly. A key motivator for this exchange rate is its role as a political tool in the ongoing trade skirmish. After a pandemic-based hiatus, the US and China seem to be picking back up their multi-faceted dispute which steers back to economic consequence. Back in 2018/2019, China used the exchange rate as an instrument to offset onerous tariffs that they could not keep pace with. If Xi and Biden continue to escalate the pressure, USD/CNH is likely to fully clear 6.50 and move back towards 7.00 – if not higher – as the costs of a restored trade war are defused back into the market. A technical cap to the downside could be seen anywhere from 6.30 to 6.20, but only full US-China cooperation would truly upend my views.

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Top Trading Opportunities in 2021
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