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Long USD/JPY Trade That's Ideally Validated

Long USD/JPY Trade That's Ideally Validated

2014-01-17 20:45:00
Todd Gordon, Technical Strategist
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Talking Points:

  • Bonds: The Most Valuable USD/JPY Catalysts
  • Elliott Wave Analysis Supports the Long Side
  • Step-by-Step Parameters for Taking This Trade

When it comes to trading USDJPY, it’s actually more important to follow US bond markets and their corresponding yields than it is to watch the general direction of the US dollar (USD).

US bond yields have a major impact on the direction of US interest rates, and interest rates have a major impact on the direction of the US dollar against the Japanese yen (JPY). The proof can be seen on the chart below, which shows the strong correlation between US 30-year bond yields and the USDJPY spot rate.

Guest Commentary: Strong Correlation Between US Treasuries, USD/JPY

Long_USDJPY_Trade_Thats_Ideally_Validated_body_GuestCommentary_ToddGordon_January17B_1.png, Long USD/JPY Trade That's Ideally Validated

Now that we understand the correlation between US bond yields and USDJPY, we should only move into USDJPY positions when there is confirmation of a similar set-up in the bond market, and it just so happens that one of our favorite set-ups for the week ahead is a long USDJPY trade that has sound confirmation from higher US bond yields.

Why Long USD/JPY Is in Play Next Week

Not to be confusing, but in the chart below, we have switched over to view the price (not the yield) of 30-year US bond futures. The reason for this is because the futures market trades 23 hours per day on the CME GLOBEX market, while bond yields are only calculated and charted approximately six hours per day. Therefore, when trading a 24-hour market like forex, it’s beneficial to track a correlated market with similar trading hours.

In the 30-year bond market, Elliott Wave analysis projects a small rally into 132.00 next week before a sizable decline targeting 130.00 ensues. If the bond rally fails next week, you now know the corresponding yield should move higher, and those rallying bond yields will help USDJPY move higher.

Guest Commentary: Long USD/JPY Trade with Confirmation from Bonds

Long_USDJPY_Trade_Thats_Ideally_Validated_body_GuestCommentary_ToddGordon_January17B_2.png, Long USD/JPY Trade That's Ideally Validated

The USDJPY Elliott wave position identifies support between 104.00 and 103.00, which is setting up a rally towards 106.00.

The trade for next week is as follows:

  • Trade Entry: Buy USDJPY at 104.00
  • Stop Loss: Place stop at 103.00
  • Initial Target: 106.00
  • Intermarket Analysis: Be sure to confirm US bond yields are indeed rallying before trading

Also, watch the corresponding video, “Bonds: The Most Valuable USD/JPY Catalysts.

By Todd Gordon, founder, TradingAnalysis.com

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Disclaimer: Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors.

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