In last week’s edition of FX QUANT LAB I felt establishing a bearish AUD/JPY view could be wise as the “charts & models aligned” – Highlighting the overvaluation of 2.1 standard deviations according to our model as well as the bearish Elliot Wave count, failure into the 61.8% retracement and hourly RSI bearish divergence. Additionally, I felt two key events: Australia’s June Employment report and Bank of Japan Interest rate announcement were likely to disappoint and thus it was a good time to jump in ahead of these events.
As it turns out, Australia’s employment figures came out very poor (-27K vs. expected 0K) and the BoJ targeted another ¥5 trillion towards the long-end of their asset purchase program, however they financed this by reducing ¥5 trillion on the short end (thus no net change overall). Consequently AUD/JPY was crushed, sending it from a high of around 81.75/80 towards the initial target of 80.00 within just over 12 hours – Unfortunately, we missed it by a few pips and the pair has since rebounded back to nearly the initial entry of 81.65.
As my mantra, the last thing you want to do is turn a once winning trade into a significant loser. Furthermore, our prop model has begun to move higher along with price (see blue line in chart below) and this suggests caution. Interestingly, hourly RSI sees another bearish divergence into today’s intraday 81.60/65 high. Ideally, if the downtrend is to continue (a downtrend is defined by a series of lower highs and lows lows), then last week’s 81.75/80 high must remain intact in order to keep this bearish view.
Accordingly, I believe it may be prudent to mitigate our potential losses (should it spike higher) by lowering the stop to the prior highs near 81.80, thereby risking around 15 pips. Typically, I would look to move it to breakeven (or better), however under the circumstances it could clip 81.65, then turn back lower and still not invalidate the downtrend.
Source: Bloomberg, FOREX.com
