Deep Dive on the JPY - Short-term trade idea... sell USD-JPY pre-Fed.

TRADE IDEA: SELL USDJPY AT 110.1, SL 110.5, TP at 109.7 and 109.4 in Extension

CRITICAL: EXIT THE TRADE BEFORE FED DAY!!

As a general rule, the JPY isn’t my favourite currency to trade given its massive reliance on yield differentials as the JPY still functions as a funding currency. But I’ve taken a gander at the USDJPY chart and I think there are potentially a few things which look interesting. 

 

The above chart shows the daily candlesticks for USDJPY. Since the pandemic (the massive spike down then back up), the JPY trended stronger for a few months but then reversed in a few months. What I find interesting, however, is the current lack of direction which has been ongoing since June. 

 

 

The above chart is a touch more zoomed in at the 4h. The red square marks the recent very tight range between a low around 108.7 at the start of August, and a high of 110.8 a week or so later. Even more so, in the last month we’ve entered an even tighter range between 109.4 and 110.4. This lack of volatility for the JPY is historically quite rare. A cursory glance over the longer-term charts shows that sizeable moves in the JPY are common. 

 

Zooming in again to the hourly chart to look at the recent ranges more closely, we see that we are definitely in no man’s land right now. If we drop to around a 109.6, then perhaps I would start to think about getting long. We’re just reaching the top of these ranges now, so I am actually fancying a short USD-JPY trade. It’ll be a tight one, but I reckon their could be some decent downside move in USD-JPY from here. 

 

What I am also starting to find interesting in this chart is the longer wicks in the last couple of hours. The JPY has basically been unchanged, but there are some hefty spikes down and then rebounds. Perhaps we are getting to a stage where this currency might want to move a bit more significantly?

 

Lots of technical analysis so far? Where is the fundamental? 

 

Well the drivers of the JPY are almost exclusively international rather than domestic. Sure, if it was suddenly announced Japan was going into lockdown and there was going to be a zillion JPY of stimulus this might have some impact, but generally the drivers are yield differentials and geopolitical risk (the JPY is a safe haven). 

 

I’m going to overlook the geopolitical side of things for now. While we could easily make a case that there is a huge amount of geopolitical risk with the Iran deal, US-China tensions, Afghanistan and more, it is not possible to predict a geopolitical blow-up and therefore I’m reluctant to try my hand at it now. 

 

So let’s look at something a bit more familiar… Treasury yields. I’ve stolen the below chart from DailyFX, but it definitely illustrates the clear relationship in recent months between JPY returns and the 10y Treasury yield, with the two moving almost perfectly in sync bar a short period in June. 

 

 

So if I am to have a longer-term view on the JPY, I really need to have a longer-term view on Treasury yields. At this point, I’m not convinced anyone has any real conviction on the next leg of Treasuries. 

 

Fortunately, if I don’t have a long-term view on Treasuries, I do have a short-term one. Tomorrow, yes we have CPI data we could cause a significant bit of immediate volatility in the 10y, but I don’t believe anything really moves until we have the next Fed meeting next week on Wednesday. Therefore, I have enough conviction in the current ranges to enter a short USD-JPY at 110.1, SL at 110.5, TP at 109.7. Risk Reward is 1:1 but could see another leg lower to 109.4 in extension. Take half profit at 109.7, move SL to Breakeven and then see what happens. 

TRADE IDEA: SELL USDJPY AT 110.1, SL 110.5, TP at 109.7 and 109.4 in Extension

CRITICAL: EXIT THE TRADE BEFORE FED DAY.