Day one: our potential USD/JPY trade

Potential strategy: sell USD/JPY at 101.50, stop at 102.25, and target 98.00.

Fundamentally I feel this pair can trade higher over the rest of the year; however in the short-term price action has become fairly bearish.

The trend is lower, with the five day moving average crossing below the 10 day moving average. Also if you look at the MACD on either the daily or weekly chart, this indicator is showing momentum is to the downside.

If you had traded around the MACD on the weekly chart and sold USD/JPY when the MACD broke below the signal line and reversed the position to hold longs when the MACD was above the signal line, you would have transacted 12 trades from the start of 2009. Importantly, not only would you have achieved a 75% success rate, but the winning trades have been five times as profitable. So with the MACD below the signal line now I won’t to align positions with this indicator.

On the daily chart the pair has closed below the short-term rising trend at 101.40 and a subsequent break of the February low of 100.75 would be bearish. The 50% retracement of the October to December rally comes in at 101.19 and this also seems to be providing support.

Fundamentally the market will be keen to focus on Thursday morning (05:00 AEST) when we get the FOMC meeting. We should see the Fed cut the pace of its QE program to $55 billion a month; however this should be largely in the price. We also get US industrial production and New York manufacturing tonight.

It’s also worth pointing out that speculators have increased net shorts on JPY last week to now hold a net bias of short 99,000 contracts. So from this perspective there is plenty of room for shorts to cover.


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