USDJPY A Trade Approaching?
Our trading plan follows clear rules, we start from Fundamentals then move to technicals and then Sentiment. If we have a trade idea that satisfies all of our trading criteria we take it if not we leave it alone and wait for the next idea.
How do you apply fundamentals to the USDJPY? The truth is you cannot, the Yen does not pay attention to the economic fundamentals of Japan because we know that the Bank of Japan is not going to raise rates for some time they are committed to keeping rates close to zero for the foreseeable future and the Federal reserve is committed to raising rates as the US economy continues to improve. You can check out the USD surprise index here which gives you a flavour for how strong the US economy has been (even though it has had a notable turn lower in recent weeks).
The truth is that the USDJPY, indeed all of the yen pairs are driven by risk sentiment, when the world looks rosy the yen goes down in value (yen pairs move higher) but one important point is that the Yen tends to move against all currencies in the same way. A simple proxy is stock markets higher yen lower, the mathematical model we use assigns the highest probability to this correlation of any in the market place. The chart below is the S&P 1200, a proxy for the worlds combined stock markets.
You can see the sharp move lower at the start of 2018 but since then we seem to have prices moving higher in channel. This is not the most bullish of moves higher but if it continues we can expect the yen pairs to find a bottom and move higher. Considering the recent news flow this performance is quite strong, we have had trade wars and EM currency issues as well as a significant fall in the price of copper which normally predicts a coming slow down.
The indices just keep grinding higher and
Higher indices means higher USDJPY.
Below is a chart of the USDJPY 4 hour as of today 16th August.
The chart (below) shows what looks like a pretty strong upward moving trend that was being defined by the orange trend line. That line has now broken and as a result we can assume that the cycle from the black (Y) low completed early August with the Blue C. There are two possibilities, if the blue C is the first wave higher then the green box represents an excellent buying area as a textbook corrective wave pattern is unfolding that should terminate around the purple (y). The second possibility is that the blue C marks a temporary top and price is going to return to the April lows around 104. We cannot sell the USDollar, it is the strongest currency across the board at the moment and the current economic situation, including the outlook for interest rates means we are only looking for opportunities to by the dollar. So if blue C is a top we are not intetested in trading, we are only interested in buying and we can only by if all the yen pairs are going to turn higher, this would mean an end to risk aversion. At the moment the Yen is strong so were not able to sell it not yet anyway.
longer term technical
The daily chart two above does not give a definitive view, since 2015 the USDollar has been trading lower in a trend defined by the black line. 2015 marks the top of an impulsive move higher that began in 2012, the price action since then can be seen as a correction of that move hgher and it corrected half of that move back in 2015 and looks to be building a new wave higher from there. The blue C, from the 4 hour, appears to be a decisive break of the black trend line which might imply that the USDJPY is heading to new highs above 125. A promising sign for the dollar long idea.
Technicals for the yen
This chart above is formed by adding together the eight major yen pairs, you can see the collapse in 2008 during the financial crisis and what looks like a confirmed uptrend since then. I am not putting any weight to the black triangle yet as it is unconfirmed. A turn higher from somewhere near current levels would not be unreasonable to continue the higher low higher high sequence.
The USDJPY is approaching an area that the waves suggest might be a good place to buy, the Combined Yen indices suggests that all the yen pairs are approaching areas where a turn higher might be close by.
The clear problem is risk aversion and the current yen strength, if risk starts to settle and the USDJPY makes it into the buying area with omentum indicators oversold we may well decide to take the trade but it is by no means a clear cut opportunity.