The currency market’s most liquid pair is drifting into new highs for the year and the benchmark Dow Jones Industrial Average has pushed beyond the 10,000 milestone. This is generally a sign to range traders that we should avoid those assets with a definable link to investor sentiment.
How stable is the EURJPY Range?
• Levels to Watch:
-Range Top: 1.2430 (Channel, Fib, SMA)
-Range Bottom: 1.2000 (Channel, Range)
• The Dow’s push above 10,000, the dollar’s 14-month low and EURJPY’s climb week-long climb are all sourced from the same fundamental current. Investor optimism is keeping the market moving towards higher return assets. However, EURJPY’s correlation to risk appetite is not as severe as say the dollar or equities. This yen cross’s medium-term trend is actually bearish. Should the drive in sentiment cool, the relationship will further slacken.
• A five-day rally from this pair shows strength; but this advance still fits nicely within a larger, bear trend. If 134 holds as resistance, we will have the third confirmed touch of the falling trend since the 8/7 reversal. In the meantime, a 50% Fib of the 8/7 to 10/2 bear wave stands at 133.80 and the 100-day SMA is just 20 points higher.
[B]Suggested Strategy[/B]
• [B]Short[/B]: We are working with a volatile pair so entry at 133.60 is somewhat aggressive.
• [B]Stop[/B]: A stop of 134.30 will not cover a volatile tail should price drift slowly higher. To secure profit, move the stop on the second lot to breakeven when the first target hits.
• [B]Target[/B]: The first objective is more than 1.5 times risk (110) at 132.50. The second is 131.50. [B]Trading Tip[/B] – The currency market’s most liquid pair is drifting into new highs for the year and the benchmark Dow Jones Industrial Average has pushed beyond the 10,000 milestone. This is generally a sign to range traders that we should avoid those assets with a definable link to investor sentiment. Fundamentally, EURJPY has its ties to this dominant trend; but we see from the development in price action over the past 10 months – and more specifically in the past two – that this cross is not moving in lockstep to the market’s most notorious, underlying current. In fact, it seems that pair only responds to risk when the trends are particularly aggressive. After a five-day upswing, this pair now looks overbought in the short-term and running low on momentum. The chart paints a very clear technical picture with significant resistance stationed above. Nonetheless, volatility is a common trait of this pair; and a reversal can produce a sizable tail. For this reason, we will not place entry orders should the market slowly rise back up to Wednesday’s intraday high; because should volatility hit when this pair is at its range extreme, we could see a false breakout that easily runs our stop. Otherwise, the tight stop and first target set well within the day’s range (while still more than compensating for risk) make for a short-term setup that should play out relatively quickly. We will cancel all open orders should we not be entered by the Thursday close.
Event Risk for the Euro Zone and Japan
European – The Euro Zone is about as stable an industrialized nation that can be found. While the region has suffered its own recession, the recovery from its biggest members is already well under way. However, it is the performance of the stragglers that will define the broader economy (especially with policy founded on the general well-being of the area rather than a single economy). In recent months, the euro has in fact found itself positioned right in the middle of the pack in terms of risk with the recovery outlook stabilizing, expectations for near-term hikes deflated by policy officials and the deficit balancing act looking more precarious and politicized. For the currency this means the fundamental trends will be defined by the exchange rate counterpart. As for scheduled event risk, there are a few notables on the docket; but their market impact is questionable. Euro Zone data is already an aggregate of known, member data; so the trade, construction activity and CPI data will likely take its pace from its German equivalent. The ECB Monthly Report for October however could hold some influence as it benchmarks growth and policy forecasts.
Japan – A critical analysis of the yen crosses suggests something very unusual: the Japanese currency is seeing its unquestionable correlation to risk appetite ease. This is perhaps most poignant observed in pairs like EURJPY, USDJPY and CHFJPY; but it is something that also be seen in the even the high-yielding currency crosses. Why is the yen losing its status? One explanation is that both the US dollar and Swiss franc are cheaper funding currencies. Another issue is that Japan is expected to reign in its stimulus. We’ll have to see growth forecasts and stimulus implications with the BoJ and Cabinet Office’s monthly economic reports.
[B]Data for October 15 – October 22[/B]
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[B]Data for October 15 – October 22[/B]
[B]Date (GMT)[/B]
[B]European Economic Data[/B]
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[B]Date (GMT)[/B]
[B]Japanese Economic Data[/B]
Oct 15
ECB Monthly Report (OCT)
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Oct 15
BoJ Monthly Report
Oct 15
Euro Zone CPI (SEP)
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Oct 16
Cabinet Office Monthly Economic Report
Oct 16
Euro Zone Trade Balance (AUG)
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Oct 18
Tertiary Industry Index (AUG)
Oct 19
Euro Zone Construction Output (AUG)
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Oct 22
All Industry Activity Index (AUG)
Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at <[email protected]>.