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Pairs to Range Trade

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Japanese Yen Range Trade Favors Newfound US Dollar Strength

Mon, Sep 1 2008, 06:03 GMT
by Ilya Spivak

FXCM

The relative strength of the US and Japan is still unclear to the market. Recent GDP revisions point to the US as being the favorite of the two. But in the mean time Tropical Storm Gustav continues to interrupt oil production in the US Gulf Coast, threatening the US Dollar ahead of its labor data releases. Albeit second quarter GDP came in stronger than expected, labor data for August may continue to see weakening as the effects of the subprime crisis continue to be felt. Still, both US and Japanese overnight rates are not expected to increase until the middle of 2009. Ultimately the market is unable to unequivocally find relative strength in either of these two currencies, allowing a ranging environment.

Trading Tip – Students leaving temporary jobs to return to school may prove to be a wild card in next week’s critical US labor market data. The removal of a large portion of the work force may on the one hand underscore the metric by subtracting payroll figures. To the contrary, the Unemployment Rate may fall as student laborers are taken out of the metric’s sample pool. These deviations may create volatile trading in the time surrounding the release. As a precaution, traders may want to wait for the release of the metric before setting their entry orders. In addition to a stop loss, we will look to control risk further by removing any unfilled orders by the end of the week of should spot close below 108.53 prior to our order being filled.

Event Risk for the US and Japan

US – The first week of September offers plenty of US event risk with labor as its primary theme. August is expected to see a cut of 71,000 versus a cut of 51,000 jobs in July while the unemployment rate is to remain steady. Be that as it may, a decrease in the rate may not be entirely out of the question. Students who return to school from a summer in the employment pool will be removed from the labor force, allowing their vacated positions to be filled by the general population. The metric might also be under strengthening pressure on increases in Durable Goods Orders. As orders for such big ticket items continue to be filled factories require additional labor to manufacture these goods.

Japan – Vehicle Sales are a large portion of the Japanese export base. Last month saw the metric rise after two consecutive months of negative changes in the rate of vehicle sales. Greenback strength in August may have a positive impact on the metric as increases in the domestic currency makes foreign produced goods more attractive. Capital Spending figures for the second quarter may see a pessimistic publication as Industrial Production in the island country saw downturns in previous months. Seeing as investors are generally forward looking, Capital Spending figures lead output statistics. The release of the metric may offer substantial insight as to further Japanese growth.

Published on  Mon, Sep 1 2008, 06:06 GMT