There are countervailing forces at work for EURJPY from both a fundamental and technical perspective; but ultimately, where momentum and risk appetite leads – the market typically follows. This is the primary concern with not only EURJPY, but every pair that has any passing correlation to risk trends.
How stable is the EURJPY Range?
• Levels to Watch:
-Range Top: 138.65 (Fib, Range Top)
-Range Bottom: 131.45 (Trend, Pivot, Fibs)
• While the euro is not exactly a primary candidate for the high-risk market segment, EURJPY has nonetheless plummeted through the end of this week on a tangible drop in risk appetite. Should the market pick this trend back up first thing next week, the fact that the euro is a in the middle of the spectrum will likely do little to offset the tide. There is also a significant round of event risk to worry about from both the European and Japanese dockets.
• The technical setup for EURJPY must be taken into context along with the other yen crosses. USDJPY, AUDJPY and GBPJPY have all marked substantial breakouts. Yet the euro cross has maintained a rising wedge pattern (establishing consistency since 3/03) with a notable test of 131.25/50 today. Should these other crosses give, EURJPY will likely follow.
[B]Suggested Strategy[/B]
• [B]Long[/B]: Being a highly volatility pair, an aggressive entry of 131.55 is necessary.
• [B]Stop[/B]: A reversal can be stretched; so a stop will be placed below the 9/2 low at 130.65. To secure profit, move the stop on the second lot to breakeven when the first target hits.
• [B]Target[/B]: The first objective is one and a half times initial risk (135) at 132.90. The second is 134.25. [B]Trading Tip[/B] – There are countervailing forces at work for EURJPY from both a fundamental and technical perspective; but ultimately, where momentum and risk appetite leads – the market typically follows. This is the primary concern with not only EURJPY, but every pair that has any passing correlation to risk trends. For the yen crosses, the ties are clear; and yet, the underlying current is not. We have seen a rally from the Japanese currency through most of this past week; but momentum was only really developed through the final few days. On the other hand, it isn’t clear if this was necessarily a market-wide shift in market sentiment as equities and other sensitive securities didn’t produce the same drive. Has the yen’s rally over-extended itself? That is something we will find out very early in the week; and that will be the time frame for our setup. This euro cross is among a few that have not yet breeched congestion patterns (though they all have seen the sharp plunge). If the aforementioned momentum was not reflective of a prominent shift in sentiment, newly developed trend will likely falter. In this case, EURJPY has the fundamental advantage of being a relatively balanced pair for risk and a prominent technical wedge that places support directly below Friday’s close. Our strategy looks for an aggressive entry to keep a tight risk/reward and the initial stop is well below the low for the month. Timing is critical. We should be entered and the market start to retrace quickly, otherwise we will cancel all open orders by Monday evening. Keep an eye on all the yen crosses on Monday’s open
Event Risk for the Euro Zone and Japan
Euro Zone – The euro is neither strong nor weak from a fundamental standpoint. Taking stock of the currency amongst the crosses, there are pairs in which the euro has rallied and pairings against which it has plunged. This mixed picture stands as testament to an interesting consideration: the euro is in the middle of the risk spectrum. Policy officials are mildly bullish on growth and hawkish but patient on interest rates. All signs point to an economy that is taking its pace from global developments. However, this middle-of-the-road status may not last for long. Data due for release over the coming week can alter the time frame for monetary policy – or at least speculation surrounding it. The German CPI data and Euro Zone estimate for September will play a crucial role in reviving a hawkish bias. Since growth is stabilizing and policy makers are calling for an exit strategy on stimulus, a return of inflation in this money flooded environment can stoke fears of rapid price growth. The German jobless claims will similarly be good for a jolt of volatility.
Japan – Investor optimism has been tempered this past week; but there have been few signs that it has reversed through the medium term. This is an important distinction to be made when trading the yen as the currency is inextricably linked to the climate for risk and reward. Should the unwinding of speculative positions across the capital markets stall next week, the yen’s incredible momentum over the past few active trading sessions will dry up. In the meantime, there are a few indicators that could alter the currency’s correlation to the prominent, underlying market driver. The Tankan report, labor data, factory output and inflation figures are all imperative indicators.
[B]Data for September 27 – October 4[/B]
[B][/B]
[B]Data for September 27 – October 4[/B]
[B]Date (GMT)[/B]
[B]European Economic Data[/B]
[B][/B]
[B]Date (GMT)[/B]
[B]Japan Economic Data[/B]
Sep 28
German CPI (SEP P)
[B][/B]
Sep 28
National CPI (AUG)
Sep 30
German Unemployment Change (SEP)
[B][/B]
Sep 29
Industrial Production (AUG P)
Sep 30
Euro Zone CPI Estimate (SEP)
[B][/B]
Sep 30
Tankan Large Mfg Index (3Q)
Oct 1
German Retail Sales (AUG)
[B][/B]
Oct 1
Jobless Rate (AUG)
Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at <[email protected]>