Volatility is extremely high; and the presence of major event risk threatens to further disrupt the currency market’s tentative breakouts and trend development. This is as far from the ideal conditions for a range trade as we can get. As such, our AUDJPY (based largely on technical considerations) is far more speculative and should be treated as such.
[B]Why Would AUDJPY Hold a Range?[/B]
[B][/B]
· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 70.50 (Fibs, SMAs, Pivot)[/B]
[B]-Range Bottom: 66.85(Fibs, SMA)[/B]
· Fundamental risk is extremely high for AUDJPY from both scheduled and unscheduled factors. From the docket, Australian data will be extraordinary after the weekend with an RBA rate decision, labor figures, retail spending and housing reports. The Japanese docket may be less influential but it is far more immediate. Altogether, the real threat for volatility is behind general sentiment trends though. This has been a clear driver the past 48 hours.
[B][/B]
· How many times can we see the beginnings of a major trend devolve into a dramatic reversal? In early April, AUDJPY broke resistance on a five month range than then retraced. Then, just yesterday, it broke its rising trend channel to later reverse. We are now in between trends with a heavy mixture of technical levels standing in as resistance.
[B][I]Suggested Strategy[/I][/B]
[B][/B]
· [B][U]Short[/U][/B][B]: Quarter-sized (or smaller) entry orders will be placed at 70.35 – right at the major pivot.[/B]
· [B][U]Stop[/U][/B][B]: An initial stop of 71.35 offers enough room to cover the potential head-and-shoulders. To secure profit, move the stop on the second lot to breakeven when the first target hits.[/B]
· [B][U]Target[/U][/B][B]: The first objective equals risk (100) at 69.35 while the second[/B][B] target is set to 36.85. [/B]
[B]Trading Tip [/B]– Volatility is extremely high; and the presence of major event risk threatens to further disrupt the currency market’s tentative breakouts and trend development. This is as far from the ideal conditions for a range trade as we can get. As such, our AUDJPY (based largely on technical considerations) is far more speculative and should be treated as such. For our strategy, the first condition for this layout is to have clear and sturdy levels to work with. Just this week, this pair broke from a rising trend channel to threat a major reversal. The rebound has put such development on hold; but overhead resistance is significant. We are looking at a patent head-and-shoulders formation (that was playing out nicely until today), which produces a right shoulder around 70.50. This level happens to further hold a long-term pivot and Fib confluence while notable 20-day and 200-day moving averages come into play just a little higher. Considering the level of activity, this position is in play now; but we must not ignore sound strategy to jump into action. We have dramatically lowered notional risk by setting the position limit to at most a quarter of our normal size. What’s more, the stop gives enough of a buffer to cover our primary technical setup. Despite all of this, risk is still very high so we will cancel all open orders by the Asian session.
[B]Event Risk for Australia and Japan
[/B]
[B]Australia [/B]– The Australian dollar is one of (if not ‘the’) market’s favored high yielding pairs. With high liquidity, a comparatively strong economy and interest rate that promises to hold up well; the currency is treated as the safest bet when the market is put on the hunt for yield and sentiment is on the rise. In this most recent upswing in risk appetite, we have seen the Australian dollar advance at an incredible pace. Sentiment is hard to forecast as the market waits for unexpected commentary from central bankers and policy officials about the state of growth and financial rescue efforts as well as the official results of the Fed’s bank stress test. However, in the unpredictable ebb and flow of trader enthusiasm, there will be visible milestones for volatility. Over the immediate future, the only indicator due is the AiG manufacturing activity report. This indicator does not have a proven history of market moving influence. On the other hand, after the weekend; the scheduled event risk becomes extreme. The RBA rate decision will be key for gauging the market’s confidence in the Aussie dollar; but a quarterly housing, employment change and retail sales reports are all notable in their own right.
[B]Japan [/B] – Japanese economic indicators typically have little sway over the yen’s direction (especially when risk trends are in play); but this week’s data may play at a deeper concern – an economic crisis. There is still some time before the government releases its first quarter GDP numbers; but following up on the first pace of activity in over a quarter of a century through the fourth quarter and warnings of worse for the first three months of 2009; pessimism will dominate. Employment, consumer spending and earnings figures will give a good sense of consumer activity and therefore growth. The BoJ rate decision may also be an unforeseen market mover.
[B]Data for April 30 – May 7[/B]
[B][/B]
[B]Data for April 30 – May 7[/B]
[B]Date (GMT)[/B]
[B]Australian Economic Data[/B]
[B][/B]
[B]Date (GMT)[/B]
[B]Japanese Economic Data[/B]
Apr 30
AiG Performance of Mfg Index (APR)
[B][/B]
Apr 30
Bank of Japan Rate Decision
May 4
House Price Index (1Q)
[B][/B]
Apr 30
Jobless Rate (MAR)
May 5
RBA Rate Decision
[B][/B]
Apr 30
Household Spending (MAR)
May 6
Employment Change (APR)
[B][/B]
May 1
Labor Cash Earnings (MAR)
[I]Questions? Comments? You can send them to John at <[email protected]>. [/I]