In the past six months, market participants have become experts in identifying the influences of risk trends and translating what it should mean for certain currencies. However, when the intensity behind risk appetite and aversion let up, this sweeping fundamental driver will inevitably lose some of its influence over the market.
[B]How stable is the EURJPY Range?[/B]
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· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 138.75 (Double Top, Fib)[/B]
[B]-Range Bottom: 131.50 (Trend, Fibs, Pivot)[/B]
· EURJPY’s link to risk trends is clear. Like most yen crosses, this pair’s counter currency is one of the most visible low-yield currencies the market has to offer. However, it should be noted that the link between price action and background sentiment has diminished significantly over recent weeks and months (just compare a EURJPY and Dow chart). This means we must be more mindful of events like the BSI index release and BoJ rate decision.
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· There are [different technical patterns](http://www.dailyfx.com/story/currency_crosses/currency_crosses/Euro_Crosses_Mostly_Constructive_1252517411953.html) developing for this pair over the past six months. Following the positive bias developed since the beginning of the year, there is a rising trend like that connects swing lows in March, May, July and September. A fib confluence offers further support near 131.50; but then there is also a head-and-shoulders pattern.
[B][I]Suggested Strategy[/I][/B]
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· [B][U]Long[/U][/B][B]: Entry orders will be set very close to support at 131.70.[/B]
· [B][U]Stop[/U][/B][B]: An initial stop of 130.60 doesn’t seem wide given volatility; but it does cover the trend. 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 [/B][B]is one-and-a-half times risk (165) at 133.35. The second is 135.35. [/B]
[B]Trading Tip[/B] – In the past six months, market participants have become experts in identifying the influences of risk trends and translating what it should mean for certain currencies. However, when the intensity behind risk appetite and aversion let up, this sweeping fundamental driver will inevitably lose some of its influence over the market. This is especially true for those pairs that have other, pressing dynamics to account for or otherwise do not have a yield differential to focus attention on the reward aspect of risk/reward trends. EURJPY has the fundamental acumen to respond to sentiment given the bullish outlook for European growth and interest rates and comparatively weak future for the Japanese recovery and benchmark. Yet, in the past few months while equities have climbed to new heights, this pair has started to trend lower in the medium term. Clearly, other fundamental factors are at work; but we should nonetheless keep a vigilant eye on the whims of speculation. In the meantime, technicals can play a bigger role in guiding price action. Our suggested strategy looks to hold with a medium-term trend and heavy support with an entry close to this floor and stop that would require a true trend break (or very volatile reversal) to trigger. Timing isn’t too much a concern; but we will cancel all open orders by week’s end.
[B]Event Risk for the Euro Zone and Japan [/B]
[B]Euro Zone[/B] – The euro has been a fundamentally stable currency for months now. Growth numbers have confirmed the region’s two largest economies have returned to positive growth, the policy authorities have been transparent in their turn to a neutral policy and there has been little discussion about any financial troubles lingering in the European markets. This has decoupled the currency from trends in risk appetite; but the link has not been fully broken. As the foil to the US dollar, the euro will indirectly feel the burden of sentiment that guides the highly-sensitive dollar. Another beneficial condition for holding a range is the light economic calendar. Among the indicators scheduled for release, few if any have a history of making a notable influence on price action. The regional trade reports and inflation data are fundamentally noteworthy; but from a speculative perspective, the member data is fully accounted for. Next week’s PMI readings is the most influential set of data as it offers a good leading and timely wrap up of third quarter economic activity.
[B]Japan[/B] – While the Japanese economy is still struggling to pull itself up from the worst recession in recent history and is marred with among the lowest benchmark lending rates in the market; the currency’s correlation to risk trends have softened somewhat in recent months. While the fundamental and return aspects of this currency have lagged most of its counterparts, the global economy is still suffering from the same setbacks – which in turn impede the return of carry. Ultimately, the more time that passes without a clear and aggressive advance or plunge in risk trends, the weaker the correlation to between the currency and fundamental driver. In the meantime, event risk may play a bigger role in price action this coming week. The third quarter BSI sentiment data offers a leading and broad look at a vital portion of the economy. And, the BoJ rate decision may not offer many surprises; but their monthly report may.
[B]Data for September 16 – September 23[/B]
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[B]Data for September 16 – September 23[/B]
[B]Date (GMT)[/B]
[B]European Economic Data[/B]
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[B]Date (GMT)[/B]
[B]Japanese Economic Data[/B]
Sep 16
Euro Zone CPI (AUG)
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Sep 16
BSI Large Manufacturing (3Q)
Sep 17
Euro Zone Trade Balance (JUL)
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Sep 17
BoJ Rate Decision
Sep 18
Euro Zone current Account (JUL)
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Sep 18
BoJ Monthly Report
Sep 23
Euro Zone PMI Composite (SEP A)
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Sep 23
Merchandise Trade Balance (AUG)