Japanese yen crosses have been extraordinarily volatile over the past few trading days; and for a break from tradition, the primary catalyst isn’t risk appetite. In fact, the yen’s unusual momentum has come from within its own boarders.
How stable is the AUDJPY Range?
• Levels to Watch:
-Range Top: 80.00 (Fib, Range High, Trend)
-Range Bottom: 76.55 (Fib, SMA, Range Low)
• For AUDJPY – and all the yen crosses – there are two prominent drivers. Risk appetite is the fundamental current that most traders have come to recognize and defer to when volatility picks up or a trend starts to develop. However, there is a new dynamic that carries with it an impact that can control price action for an indefinite period. Traders are now trying to confirm whether the government has taken intervention off the table for good.
• From a technical standpoint, AUDJPY looks as if it has finally found resolution to a terminal wedge formation that was in the making since February. However, a temporary range floor may have been confirmed on a confluence of factors around 76.50. Looking for a short near the range top at 80 plays at both a range and a reversal at former support.
Suggested Strategy
• Short: Calling a reasonable entry is as troublesome as volatility; but 79.35 should do.
• Stop: A wide stop above resistance is needed; but notional risk will restrain us to 80.65. To secure profit, move the stop on the second lot to breakeven when the first target hits.
• Target: The first objective is one and a half times initial risk (195) at 77.40. The second is 74.40. Trading Tip – The Japanese yen crosses have been extraordinarily volatile over the past few trading days; and for a break from tradition, the primary catalyst isn’t risk appetite. In fact, the yen’s unusual momentum has come from within its own boarders. Japan’s new Finance Minister, Hirohisa Fujii, has on a number of occasions voiced his position against government intervention in exchange rates. This is a considerable shift for yen traders who have lived under the assumption that the exchange rate could be manipulated at any time in order to protect the country’s export base for decades. What’s more, it is very difficult to measure the influence this long held belief has had on the currency and how much of an adjustment can be expected should such concerns completely evaporate. This is a fundamental concern that we will have to monitor constantly along with the general level of risk appetite in the market. The duel drivers can have a complicated impact on price action; but both risk appetite and intervention expectations are still highly drawn factors. Therefore, the path of least resistance is for further reduction in optimism and manipulation premium. This fits in well with the technical situation we see AUDJPY in. Breaking a rising wedge formation that has been in development since February, wear are seeing a retracement of the initial breakout drive. A test of former support can confirm new resistance and the development of a new trend. However, volatility is a considerable problem as our entry cannot be too aggressive and reversals can be messy. Our strategy looks to reduce risk; but reducing position size and widening stops would be beneficial. We will cancel all open orders before Friday.
Event Risk for Australia and Japan
Australia – A steady wind of appreciation is blowing for the Australia dollar. There is little doubt that investor sentiment is in control of the currency’s bearing; but there is a natural bias for it to move more surely when risk appetite is on the rise. The country’s strong economy as well as the central bank’s hawkish language make sure of that. Nonetheless, it will be important to watch for significant corrections in speculative interests which could undermine the Aussie dollar’s hold. As for event risk, retail sales, credit conditions and factory activity are nearby but second tier in terms of volatility. Next week’s RBA rate decision is the real driver for a policy timetable.
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 over the coming week, the yen’s incredible momentum over the past few active trading sessions will dry up. Further complicating things, we also have to consider what impact intervention expectations are having on price action. Finance Minister Fujii has gone back and forth on his stance for government manipulation since the yen has rallied. 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.
Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? You can send them to John at <[email protected]>.