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Day one: our USD/JPY trade

Potential strategy: sell USD/JPY at 97.80, with a  stop loss at 98.40, and a potential profit target or 96.70.

Fundamentally I am fairly neutral on the USD in the short-term, given the strong downside moves of late. However, over a medium and certainly longer-term view the USD remains one of my favourite currencies to own for a number of reasons, including growth, improving currency account and trade deficits and normalisation of central bank policy. I also feel there is very little, if any chance the US will default on its debt.

In the short term though, trading from the short side (i.e. profiting from a move lower in USD/JPY) is favoured as all indicators are giving clear SELL signals.

The pair has broken the rising trend from the June lows and this now becomes resistance at 98.00. If you look at the five-, ten- and twenty-one day moving averages (all short-term moving averages), they are all aligned and headed clearly lower. The daily MACD is firmly below zero too and headed lower, suggesting that rallies should be contained with the September downtrend.

Given the oversold nature of the pair and judging by Friday’s candle on the charts, I feel waiting for a bit more of a rally to 97.80 could be prudent, hence my limit to sell at 97.80. I would look to set a potential stop at 98.40 (just above the 38.2% retracement of the recent sell-off that started on September 11). My target is the 200-day moving average, which currently sits at 96.63.

Fundamentally I feel there could still be some more stress in the USD next week unless we hear an agreement from US politicians. There are some signs that the so-called Tea Party are starting to crack in their push to dismantle Obamacare, however will there be an agreement this week? I am not so sure.

On the data front, in Japan we get the current account balance (October 8), trade balance (October 11), while we also get speeches from BoJ governor Kuroda on October 10 and 11.

In the US we are scheduled to get the US payrolls (consensus is for 180,000 jobs) report on October 12; however this very much depends on whether the government can re-open and workers return to work.

If there is no agreement in place by next Monday (October 14) then the BLS (Bureau of Labor statistics) will not be there to compile the October survey and thus there is a possibility the report never makes it to the market. This could increase downside pressure on the USD.

The 200-day moving average is very important for USD/JPY and I feel the USD bulls will look to defend this level quite aggressively. The pair has held above this long term average for well over 230 days now and as such I feel taking profits here could be prudent, while the market pauses. A close below this moving average could have much far reaching implication on future price action.

USD/JPY

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