USDJPY Offers Opportunity in an Ill-Defined Range

While congestion has been a common sight for the Forex market this past week, volatility is still unfavorably high and range boundaries are either ill-defined or otherwise untested. Therefore, all reasonable range-based setups have to have a longer life and wider stops than usual. Fitting these conditions, USDJPY offers a reasonable technical and fundamental scenario for a successful strategy for the week ahead.

[B]Why Would USDJPY Hold a Range?[/B]

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         ·         [B][U]Levels to Watch:[/U][/B]

         [B]-Range Top:       99.75 (Pivot, Fib)[/B]

         [B]-Range Bottom: 94.25 (Fib, Range)[/B]

         

         ·         We seem to be heading into yet another week where [risk appetite will struggle for a clear path](http://www.dailyfx.com/story/trading_reports/dynamic_carry_trade_basket/Risk_Appetite_and_Carry_Interest_1242949565270.html). On the other hand, the dollar has recently deviated from its safe haven responsibilities, coming out on the short-side of nearly all of its major counterparts on an otherwise modest rise in risk appetite. The plunge in the greenback was muted against the yen though thanks to their equivalent economic conditions and roles as anti-risk vehicles.

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         ·         Technicals for USDJPY have been notoriously ‘loose’ for over the past few months. Initially 96 was a prominent pivot backed by a notable Fib retracement and moving average. The current floor is seen around 94 in the next Fib retracement in the same series and through a long-term pivot. However, false breaks have been frequent here.

         

         [B][I]Suggested Strategy[/I][/B]

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         ·         [B][U]Long[/U][/B][B]: Half-sized entry orders will be placed at 94.60 to offer a reasonable buffer above support.[/B]

         ·         [B][U]Stop[/U][/B][B]: An initial stop of 93.70 covers last week’s swing lows but not March’s. 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 (90) at 95.50 and the second[/B][B] target will be 97.60. [/B]

                         [B]Trading Tip[/B] – While congestion has been a common sight for the Forex market this past week, volatility is still unfavorably high and range boundaries are either ill-defined or otherwise untested. Therefore, all reasonable range-based setups have to have a longer life and wider stops than usual. Fitting these conditions, USDJPY offers a reasonable technical and fundamental scenario for a successful strategy for the week ahead. While there has been a rather aggressive and steady move against the US dollar across the board over the past week, the momentum and volatility to this move have been downplayed for the this pair. The practical explanation to this divergent price action lies in the dour projections for each economy’s health as well as their respective role against the risk/reward setting. In setting up the strategy for this pair, we have to account for the volatility near support by setting entry at an aggressive level. At the same time, we have set the stop relatively wide; but not wide enough to cover the March 19th swing low as that would leverage notional risk to unacceptable levels. Short-term technicals (on the 60 or 240 minute charts) show a minor breakout may develop relatively soon. If our entry has not hit by the end of Wednesday’s session, we will cancel all open orders.

[B]Event Risk for US and Japan[/B]

[B]US [/B]– The US dollar has been consistently sold over the past week as a revived sense of risk appetite has contradicted the currency’s primary source of value through the worst of the financial crisis last year. Are conditions genuinely improving? Isthe dollar as fundamentally weak as this drop would suggest? These are questions that will be answered with time or a specific catalyst behind one of the bigger market themes still dominating the headlines. In the meantime, there is plenty of scheduled economic data to establish a bearing on the long-term outlook for the US and prepare for short-term volatility following notable economic releases. Wednesday and Thursday are dominated by housing releases including existing and new home sales as well as the lagging house price index. The durable goods orders and ISM manufacturing reports are other frequent notables that may see their influence have an unexpected impact on price action. Finally, the first revision for 1Q US GDP may be an unexpected driver should the components mark large shifts.

[B]Japan[/B] – Risk appetite is the primary driver for the Japanese yen. In the past month, there has been a clear and significant shift in sentiment as equities, bond yields, commodities and high-return currencies have all rallied. How long this positive shift lasts however is anyone’s guess. Objective fundamentals continue to erode, there are still major pitfalls to credit conditions going forward and the outlook for higher returns is bleak. This leaves the single currency in a precarious position that is defined by the fickle sentiment and the hope for capital returns alone. In the meantime, the docket is lined with major milestones for long-term growth forecasts. Retail sales, consumer spending, employment, factory activity and housing will all be measured by economic data.

                                      [B]Data for May 24 – May 31[/B]

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                                   [B]Data for May 24 – May 31[/B]

                                                     [B]Date (GMT)[/B]

                                   [B]US Economic Data[/B]

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                                   [B]Date (GMT)[/B]

                                   [B]Japan Economic Data[/B]

                                                     May 27

                                   Existing Home Sales (APR)

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                                   May 27

                                   Large Retailers’ Sales (APR)

                                                     May 28

                                   Durable Goods (APR)

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                                   May 28

                                   Jobless Rate (APR)

                                                     May 29

                                   GDP QoQ (Annualized) (1Q P)

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                                   May 28

                                   Industrial Production (APR P)

                                                     Jun 1

                                   ISM Manufacturing (MAY)

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                                   May 29

                                   Housing Starts (APR)

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Questions? Comments? You can send them to John at [/I]