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Pairs to Range Trade

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Risk Trends A Deciding Factor For EURJPY Range

Wed, Feb 18 2009, 05:59 GMT
by John Kicklighter

DailyFX

The EURJPY range setup that we see today is very similar to the GBPCHF position we laid out yesterday. High volatility and a clear correlation to vague risk trends makes make this another short-term setup that requires a sound strategy.

Why Would EURJPY Hold a Range?

• Levels to Watch:
  -Range Top: 120.00 (Fib, Pivot)
  -Range Bottom: 115.75 (Trend, Fib)

• A major, technical break from EURUSD this morning may have redefined the euro’s path; but traders are still waiting for confirmation. While EURUSD may have produced a volatile break from congestion, the most liquid major has not overrun its recent, multi-year swing low and the other yen crosses have yet to follow suit. Looking at the fundamental drivers going forward, scheduled event risk is not as important as general risk sentiment at this point.

• EURJPY has seen congestive price action for nearly four months now, though it was the chop from the last month that is really appealing from a range trading point of view. An ascending wedge has pushed against a long-term bearish bias. Support is moving with a notable trendline coinciding with a Fib and series of swing lows.

Suggested Strategy

• Long: A relatively aggressive entry for a half-size position will be placed at 115.80.

• Stop: Our initial stop will be set at 114.60. This is covers the Feb 12 swing low but is still tight. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (120) at 117. The second, 118.20 objective is reasonable.
  

Trading Tip – The EURJPY range setup that we see today is very similar to the GBPCHF position we laid out yesterday.
High volatility and a clear correlation to vague risk trends makes make this another short-term setup that requires a sound strategy. Considering the highly visible, bearish break from EURUSD this morning and the tentative push above resistance in USDJPY, there may be a fundamental shift for this and other crosses underway. As such, we have adjusted our strategy to set limits on risk and ensure we are not caught up in a breakout. Our entry is very aggressive – just above the rising trendline and today’s low – but it is necessary to maintain a reasonable risk reward. With half size orders, we can set our stops below last week’s swing low to avoid any minor false breakouts and ensure that the notional risk is well within reason. Our first stop is reasonable given a time and technical perspective, while the second objective is also a reasonable fraction of the EURJPY’s total range. Since this pair is highly volatile and external risk is high, we will close all open orders within 24-36 hours or should spot it 117.50 before our entry level.

Event Risk Euro Zone And Japan

Euro Zone – Fundamental traders are still uncertain over the health of the euro. In the US, UK and Japan, speculators have a firm grounding in their interest rate, recession and financial trouble forecasts. However, for the Euro Zone, central bank commentary suggests the policy authority is at the end of its rate regime, there is still a positive slant on economic performance (when compared to the region’s global counterparts) and the financial malaise has been met with government money and threats of nationalization. However, in recent weeks this vague, bullish sentiment has clearly started to deteriorate though. Looking at the economic indicators on the docket this week, there are a few notable releases that could alter sentiment for the euro. Friday’s PMI data from Germany and the Euro Zone will help define growth expectations for the first quarter, following the plunge measured through the fourth quarter readings just a few weeks ago. Aside from these scheduled releases, an eye should also be kept on the developments in Europe’s banking sector. Rating agencies have taken to downgrading a few EC members, and the financials sector is especially prone.

Japan – The Japanese yen has traditionally been the safe haven of choice for the currency market; but this defining attribute may be fading as the market starts to take fundamental health more seriously. Just yesterday, the government released its first round, fourth-quarter GPD numbers with a 12.7 percent annualized contraction – the worst in 35 years. With the top BoJ economist suggesting the first quarter could be ‘unimaginable,’ holding Japanese asset is looking more and more like a risky proposition in a global recession. The focus will remain on growth and the government’s efforts to turn things around. On this front, the Bank of Japan’s rate decision will be interpreted for any suggestion that they are taking the United State’s lead in turning to alternative policy efforts. And, for an objective read on growth trends, the central bank’s monthly report due Friday will help benchmark speculators expecting something worse.

Published on  Wed, Feb 18 2009, 06:04 GMT