Trade Idea parameters
Entry: Short EURJPY in the 107.25-45 area
Stop: 107.81 bid
Targets: 106.10 and 105.70
- This is a mostly technical trade, but also looks at fading some of the recent Euro strength because the single currency has seen quite a run-up and could face a bit of consolidation through the next couple of days of event risks, particularly tomorrow's ECB meeting, where a surprise rate cut could see the Euro sharply weaker. As well, the JPY bears may have overplayed their hand in the short term.
- The technical arguments for the trade include recent momentum divergence and a reversal as discussed in the chart below.
- Another observation here is that traditionally, very strong bond markets have been associated with a strong Japanese Yen. Granted, the prospect of a new, aggressive tone on JPY weakening from Japanese political leadership after the mid-December elections is noteworthy, but Japanese JGB's have also been strong, with the 10-year yield dropping to the lowest level in many years. That doesn't quite fit with the weak JPY story, and suggests that the market might ought to look for some measure of consolidation.
Trade Management: If the pair trades below 107.00, traders may look to pull stops down to 107.53 bid and then to breakeven or better if 106.70 gives way.
Risk: The EURJPY has generally been in an uptrend. While this is an attempt to look for a larger reversal, the coming event risks could see the pair pull back higher, particularly if risk appetite strengthens again and/or if bond markets weaken.
EURJPY recently showed divergent momentum. The pair reached new highs in the Asian session overnight, but reversed, so the momentum divergence is maintained (higher prices with lower momentum readings) and we have a pattern reversal of the latest impulse higher, suggesting that the downside may be the side of least resistance in the near term.
Longer-term chart: EURJPY
The last five years and more of EURJPY