The US dollar rallied significantly during the course of the trading session on Thursday to test the top of the shooting star from the previous session, suggesting that we are going to try to break above it. If we do, that would be an extraordinarily bullish sign, and could send this market towards the ¥110 level again. This is probably not about the US dollar, but more or less about the Japanese yen as it is getting hammered by several different currencies right now.
USD/JPY Video 30.04.21
The 50 day EMA is currently offering support, and it does look like the market is respecting that. Furthermore, the 38.2% Fibonacci retracement level has offered support, and we did form a couple of hammers in that general area. That being the case, I think that the uptrend can continue, but if we were to break down below this hammers, that could open up a move down to the 200 day EMA.
Ultimately, I think that the Japanese yen is a currency that is going to be in trouble going forward, due to the lack of yield coming from the bond market. With this being the case, I do look to buy the dip in not only this pair but multiple other ones like the AUD/JPY, NZD/JPY, and even the lowly CHF/JPY pairs. With this being the case, I think that we have much further to go, and, in this pair, I suspect that ¥110 will be the next target if we can break above that shooting star.
GBP/USD last week fell 236 pips from 1.4015 to 1.3776 while overbought GBP/JPY rose 257 pips from 148.14 to 150.71.
Known since the 1930’s, the Japanese pegged GBP/JPY to UK Gold for not only economic viability but the first incursion to the western world of finance. The standard to hold GBP/JPY to the UK held throughout Bretton Woods. Upon the 1972 free float, GBP/JPY became attached permanently with high +90% correlations to GBP/USD.
All JPY cross pairs followed with high and positive correlations as AUD/USD and AUD/JPY, NZD/USD and NZD/JPY, EUR/USD and EUR/JPY while USD/CAD and CAD/JPY became polar opposites as both permanently correlate negatively. USD/CHF and CHF/JPY traditionally also hold opposite correlations.
The Japanese offered not only a double trade but GBP/JPY and GBP/USD as the same exact currency pairs. The same principle holds true for EUR/JPY and EUR/USD, AUD/USD and AUD/JPY and NZD/USD and NZD/JPY. The double trade is permanent for USD/CAD and CAD/JPY.
Why JPY cross pairs remain overbought into week 6 amd not falling with counterpart currencies is the USD/JPY problem to correlations. While GBP/USD correctly correlates to GBP/JPY at +94%, GBP/JPY also not correctly correlates to USD/JPY at +83%. A further problem exists as GBP/USD correlates to USD/JPY at +46 %. All correlations are not only running positive but this situation is the exact same for AUD/JPY, NZD/JPY, EUR/JPY, CAD/JPY and explains why prices remain high and overbought.
Positive correlations are the result of exchange rate prices and relationships to moving averages since correlations are found within the context of averages. USD/JPY trades above vital 105.70, GBP/USD above 1.3697 and GBP/JPY above 144.80. Correlations are positive because prices trade above respective high / low averages.
Required to assist GBP/JPY to drop is GBP/USD breaks 1.3697 or USD/JPY trades below 105.70. GBP/JPY then decides to fully correlate to USD/JPY or GBP/USD. GBP/JPY in every instant follows GBP/USD as the 91 year correlation and order of currency markets.
Current GBP/JPY trades 1156 pips above GBP/USD and 2506 pips below GBP/CAD. GBP/JPY larger range from GBP/USD becomes 144.08 and 1.5564. GBP/JPY above is located the 14 year average at 155.38 and the 10 year at 148.36.
Prior to the 2016 interest rate changes by the central banks, the market order to currency pair arrangement existed as GBP/USD, GBP/JPY, GBP/CHF then GBP/CAD.
The new order is arranged as GBP/CHF, GBP/USD, GBP/JPY then GBP/CAD and seen as GBP/CHF 1.2855, GBP/USD 1.3820, GBP/JPY 149.86 or 1.4986 then GBP/CAD 1.7292. Much daylight exists for GBP/JPY to trade freely between GBP/USD and GBP/CAD yet 250 pips traded last week from a distance of 1100 and 2500 pips between exchange rates.
Why GBP/CHF and all currency pairs arranged as Other Currency / CHF dropped from contention as support is due to the uniqueness to the SNB’s interest rate system. Libor is miles from actual interest rates as first comes Saron, Call Money rates and the most vital Debt Register Claims.
JPY cross pairs overall contain downside moves from GBP/JPY at 300 pips and 200 for AUD/JPY and NZD/JPY.
USD/JPY for the week is not only light years overbought but the 5 year average is located at 109.01. A good target is found at 106.65.
GBP/JPY big break lower is located at the 10 year average at 148.38. A break then GBP/JPY trades 146.00’s easily.
GBP/USD this week opens between 1.3768 and 1.3840. Below 1.3768 challenges most vital 1.3697, above 1.3840 then GBP/USD travels much higher.
GBP/CHF and GBP/CAD run good and positive correlations at +93% and +96 % for GBP/CAD. For GBP/NZD and GBP/AUD remain problems as correlations run negative at -43% and -64% for GBP/AUD.
Included are GBP/JPY moving averages from 5 day to 253 days. The averages are perfect and derived from the ECB. The first number is the day average followed by trading days then the average.
A 20 day average is actually 15 days, a 50 day average is actually 36 days. Trading day averages to factor perfectly start at the beginning of every year then the numbers increase as days trade. A 50 day average is most stable as it only trades 36 to 50 days.
A 5 day average begins Monday at 2 days, then 3 for Tuesday and Wednesday and 4 for Thursday. A full 5 day average only trades on Fridays.
5 Day 5 149.2391
10 Day 9 149.1325
20 Day 15 148.3808
50 Day 36 145.2691
100 Day 71 142.5398
200 Day 143 139.9417
253 Day 180 139.1231
As GBP/JPY trades lower then the averages drop.
Targets are not only known miles ahead but targets stack to watch trades unfold.
Current targets: 149.7549, 149.8496, 149.5086, 148.1852, 146.0887, 143.7901, 143.0356.
The ECB and most central banks factor exchange rates to 6 decimal places and 4 for USD/JPY and JPY cross pairs and I follow the ECB exactly.
AUD/USD broke its long standing and much written line at 0.7821 and traded 57 pips to 0.7877. Above 0.7821, AUD/USD ranges between 0.7821 to the 10 year average at 0.8305 or 484 pips. Below 0.7821, AUD/USD trades 0.7821 to 0.7308 or 513 pips. Below 0.7821 exists 0.7605.
DXY last week maintained its 148 pip range between 89.95 to 91.43. Above 91.43 next targets 92.78 in a 135 pip range.
GBP as written in the last post maintains deep overbought status across all GBP pairs except GBP/NZD. Watch 1.9136 this week for best moves.
EUR/USD opens in fairly perfect neutrality however ranges continue to compress. Problem pair EUR/JPY and all JPY cross pairs maintain deeply overbought status for week 4. EUR/CAD, EUR/NZD and EUR/AUD open the week massive oversold. EUR/CAD and EUR/AUD will provide the best moves.
Stand clear EUR/CHF as AUD/CHF and NZD/CHF will provide better movements.
NZD/USD 0.7267 then 0.7356 Vs 0.7267 and 0.7990. NZD/CAD is overbought while NZD/JPY heading into week 4 maintains richter scale overbought status.
Overall, NZD/USD traded 200 pips from 0.7100’s to 0.7300’s for the past 2 months and provided support to GBP and AUD to allow both to move higher. Explains the divergence seen in EUR/NZD Vs GBP/NZD this week.
USD/JPY watch 104.97 and USD/CAD 1.2587 Vs 1.2826.
Overall currency markets are in the great deadlock between natural opposites EUR/USD and USD/JPY. Current USD/JPY at 105.74 trades 84 pips above its vital high/ low point at 104.89. This line is rising. EUR/USD trades around its current high /low point at 1.2039. This line moved 1 pip lower since yesterday’s ECB at 10 A.M. EST. EUR/USD and USD/JPY achieved its crowning achievement by rhe great divide to currency pairs.
USD/CAD at 1.2600’s and GBP/USD at 1.3800’s or 1200 pips informs this distance is far to wide. GBP/USD trade to 1.4000’s while USD/CAD was located at 1.2500’s or 1500 pips assisted to diminish the distance yet 1200 pips informs a big move is ahead. Normal distance is 3 to 500 pips.
For the past four weeks as written, JPY cross pairs were and continue to trade in severely overbought territory. The degree of overbought is recognized as 500 pips from AUD/USD 0.7700’s and AUD/JPY at 82.00’s and 500 pips from NZD/USD 0.7100’s to NZD/JPY 76.00’s. Normal is in the vicinity of 100 to 200 pips maximum because NZD/USD and NZD/JPY are the exact same currency pairs much the same as AUD/USD and AUD/JPY.
The divide grows wider at 800 pips from GBP/USD 1.3600’s to GBP/JPY at 147.00’s and 700 pips from EUR/USD 1.2000’s to 127.00’s for EUR/JPY and normal is 100 to 200 because GBP/USD and GBP/JPY are the exact same currency pairs much the same as EUR/USD and EUR/JPY.
USD pairs EUR/NZD at 1.6700’s trades 2500 pips to GBP/NZD 1.9200’s. Normal trades around 1600 to 1800 pips and 700 pips off kilter.
The EUR/USD and USD/JPY relationship is distinguished by the massive and extreme divide between and among currency pair prices, particularly USD and overall cross pairs as the primary driver to current prices.
Today’s trade is presented as a two trade option by matching significant day trade support, resistance and levels. Short the highs and long the lows.
USD/JPY highs Vs EUR/USD Lows.
USD/JPY up target 106.43 vs EUR/USD 1.1985 lows.
USD/JPY 106.36 Vs EUR/USD 1.1998.
USD/JPY 106.29 V EUR/USD 1.2011
USD/JPY 106.16 Vs EUR/USD 1.2015
USD/JPY 106.09 Vs EUR/USD 1.2023
USD/JPY 106.03 Vs EUR/USD 1.2028.
USD/JPY 105.96 Vs EUR/USD 1.2034.
EUR/USD Highs Vs USD/JPY lows
EUR/USD 1.2107 Vs USD/JPY 105.37
EUR/USD 1.2099 Vs USD/JPY 105.44
EUR/USD 1.2091 Vs USD/JPY 105.51
EUR/USD 1.2076 Vs USD/JPY 105.58
EUR/USD 1.2068 Vs USD/JPY 105.63
EUR/USD 1.2061 Vs USD/JPY 105.71
EUR/USD 1.2053 Vs USD/JPY 105.79
EUR/USD 1.2049 Vs USD/JPY 105.87.
EUR/USD is a complete opposite pair to USD/JPY however prices never match pip for pip as the relationship runs 7.62 pips for EUR/USD Vs 6.62 for USD/JPY.As a side note all market prices especially Stock Indices are factored the exact same as a currency price. The difference is in the name and number yet its all the same.
Not many pips trade anymore as the old days of trading therefore pips and profits are maximized by multiple longs and shorts per currency pair. All information is known in advance of the trade therefore no stops, charts and whatever is needed nor applied.
Monday starts with a slight optimism on the major exchanges but it’s hard to call it a game-changer as the volatility is rather low and we can sense a holiday mood on the trading floors. Worry not, in this environment we were still able to find three interesting trading setups, which you may find very interesting.
First one is a small update about the AUDNZD, which we mentioned a few times at the beginning of the month. Back then, the price was testing crucial resistance on 1.085. Price was trying to close a day above that level since September 2019. In ourprevious analysis, we said that price closing a day above that resistance will be a legitimate buy signal. And it did! Since that time, we got 8 bullish days in a row and price is currently 180 pips higher, what a move! With this, the long-term sentiment is definitely positive but a chance for a short-term bearish correction is rising.
As for the NZD, we do have a very negative situation on the NZDJPY, where we broke the lower line of the rectangle, which gave us a proper sell signal. Now, we are testing the neckline as we do have a proper head and shoulders formation. Priceclosing a day below the neckline will be a super strong sell signal, especially when we will consider a weekly chart and the shooting start candlestick bouncing from the long-term downtrend line.
Last but not least is the EURPLN, which is on the verge of breaking crucial horizontalsupport – 4,4. In the shorter-term, the price created a rectangle pattern and Mondaystarts with an attack on its lower line. First attack seems unsuccessful and it actually opens a way up north based on the possibility of a false breakout pattern. One is certain here. We are getting closer and closer to a final decision, sharp breakout and a slide or a bounce.
The US dollar gapped lower to kick off the trading session on Monday, but then bounced enough to reach towards the ¥107 level rather early. With that being the case, the market looks highly likely to continue seeing selling pressure above, and I think that if we do rally from here, we are likely to see the ¥107.50 level offer even more selling pressure.
The ¥107.50 level has been a magnet for price for this pair and I think at this point we are simply killing time. We look at the longer-term charts, you can see that there is a massive symmetric triangle, which is looking highly likely to lead towards a bigger move given enough time. However, right now we are not quite ready to do anything so unless you are a short-term trader, this pair is not going to offer much.
USD/JPY Video 23.06.20
That being said, the chart is not completely useless. Notice how the Japanese yen is doing and you can translate that is a secondary indicator in other pair such as the GBP/JPY pair, NZD/JPY pair, etc. Ultimately, the market could show strength or weakness in the Japanese yen that you can use in other markets. Once we finally get an impulsive move, perhaps on the weekly chart, then we can start to take a look at bigger trades. Until then, this is simply an indicator or a five-minute chart type of market that is simply back and forth with a range bound system being the most effective way to trade until conditions change.
The US dollar has cracked below the ¥107 level during the trading session on Thursday, as we continue to see a lot of negativity out there. After all, the Dow Jones Industrial Average futures are down about 900 points at the open, and this typically favors this pair falling due to the fact that the market starts looking for safety in the form of the Japanese yen. If we can continue the momentum, the next support level is closer to the 160 and level.
USD/JPY Video 12.06.20
On the other hand, if the market saved itself yet again, then it is likely that we will go looking towards the ¥107.50 level, and then after that go looking towards ¥108. Moving above the ¥108 level allows for the market to go looking towards ¥109, and of course followed by ¥110. I do not necessarily think that we are suddenly going to rally, but then again it is easy to say what we “should” and” should not do”, because quite frankly the markets have not been paying attention to any of that for a while.
With this being the case, I continue to use this pair more or less as a Japanese yen strength or weakness indicator, and not necessarily trade it directly. At this pair continues to fall hard, then it is possible to short other pairs that will give you a little bit more momentum like the AUD/JPY pair, NZD/JPY pair, CAD/JPY pair, and so forth. This pair is a little congested and noisy, which makes quite a bit of sense considered both currencies are thought of as “safety currency.”
The US dollar has gone back and forth during the trading session on Wednesday again, as we continue to dance around just below the ¥108 level. At this point, if we can break above the ¥108 level we could go as high as ¥109 without much trouble. To the downside, the ¥107 level should cause major problems. Ultimately, the market breaks down below there could send this market towards the ¥105 level. At this point, this is a market that is fighting back and forth to determine which one of the safety currency is the world wants to own. At this point, it is an argument that I am not willing to have and therefore I am on the sidelines. Ultimately, I think that the market will make a decision but right now this is simply a gauge to determine which one of the safety currencies you want to own against riskier currencies.
USD/JPY Video 23.04.20
For example, if the US dollar rallies against the Japanese yen, then I want to short something like the New Zealand dollar against the US dollar as it is the stronger of the two safety currencies. Alternately, if this pair falls, I would rather short the NZD/JPY pair. That being said, once we break out of this tight range, then you can play this market by itself. In the meantime, the USD/JPY pair is essentially a technical indicator as to where I will be trading other markets. I think that we are in for a continuation of the quiet trading that we have seen for the last couple of weeks.
First pair is the USDJPY, where on Wednesday, the pair broke two ultra-important mid-term resistances. First one is the horizontal one around 109.3, which is with us since May and the second one the dynamic one (orange), which can be also described as a neckline of the iH&S formation. As long as we stay above those two lines, the sentiment is definitely positive.
Second pair is the NZDJPY, where the last few days were really great for the buyers. Weakness of the JPY is just the part of the equation. Strength of the New Zealand currency is an additional bullish factor here. Apart from breaking a crucial horizontal resistance, the price broke also blue down trendline. NZDJPY closing a day above that resistance will be a legitimate buy signal.
Last one is the GBPJPY, where the price is trying to escape from the rectangle sideways trend, which started almost 7 weeks ago. Once the price will close a day above the upper orange line, we will get a proper buy signal.
This article is written by Tomasz Wisniewski, Director of Research and Education at Axiory
The NZD/JPY is bullish. It’s a bit slow pair with only 39 pips of the ATR(5) so patience is needed for any trades that happen.
69.00-10 is the POC zone. We could see a bounce up due to different bullish confluence which add to overall signal. Bullish order block, ascending trend line, bullish hammer off support and re-entry dot indicating oversold price on 4h. Targets are 69.50 and 69.95. Ideally the price should stay above 68.70.
The analysis has been done with the CAMMACD.MTF template.
For more daily technical and wave analysis and updates, sign-up up to our ecs.LIVE channel.
Many green pips, Nenad Kerkez aka Tarantula FX
I’ve focused on positioning, where I have looked at the weekly Commitment of Traders (CoT) futures report. Skew, which is the demand for put option volatility over call volatility, which, for me, is the best guide around sentiment – the more negative the number the greater the expected move to the downside and vice versa. And volatility, where I have looked at both realised and implied volatility, which I use for risk management and position sizing. For more instruction, do watch the webinar recent conducted as part of TraderFest –
It’s the USD that interest us most this morning, as the rate of change is moving into the top of its range, and it’s attracting just as much attention from the US President, as it is momentum-focused traders.
JPY the place to be on open
At this stage, we can key off the FX open, where the USD has weakened 0.2% against the JPY, but this is not the USD finding fault, as the greenback is up against the higher beta AUD and NZD, and finding buyers against the CNH, although todays CNY fix was far stronger than the street expected – a risk positive function.
The move into the JPY a reflection that Trump’s 15% tariffs have formally kicked in on around $110b of Chinese exports (to the US), and we’ve seen China come back placing tariffs up on $75b of US exports, and one questions if there was an element of the market expecting the implementation of tariffs to be put on ice, given the positive noises from both camps of late. It seems not.
The news flow from Hong Kong would not have gone unnoticed, and we watch to see if there is an increased response from the Chinese authorities. A Chinese manufacturing PMI print of 49.5 (vs expectations of 49.6) has also been a consideration for AUD and NZD sellers here, where we see NZDJPY and AUDJPY lower by 0.6% and 0.3% respectively. It won’t surprise then the S&P 500 and NASDAQ futures have re-opened and currently sit 0.5% and 0.7% lower respectively, with Asia markets down smalls. Here, we see the ASX 200 -0.1%, Nikkei 225 -0.3%, and the Hang Seng -1%.
EURUSD moves in focus
Despite a whole barrage of ECB speakers last week, including somewhat hawkish commentary from Knot, Lautenschlager and Weidmann, throwing some uncertainty into the” kitchen sink” approach expected from the bank at the 12 September ECB meeting. The focus has been specifically on the break of 1.10 in EURUSD, and certainly, it was significant enough to garner the attention of Trump, who said the EUR is dropping “like crazy, giving them a big export and manufacturing advantage”. Let’s see how things stand on Wednesday when ECB chief economist Lane speaks in London (21:00aest), and he could really move the dial in a market which currently places a 47.7% probability that the ECB’s deposit rate is taken to -60bp and 52.3% to -50bp. The argument, like it is in many other nations, seems to be a growing call on fiscal policy as a support driver for economic fragility.
The fact Trump said the USD is the “strongest in history”, highlights the weight he puts on the trade-weighted USD, which sits at 130.66, and at an all-time high. We trade the USD index (DXY) though and whether we are looking at the feel and structure on the daily or weekly timeframe the set-up looks so bullish.
The interesting aspect is, that while we will likely to see a better feel to this week’s US ISM manufacturing print, amid robust payrolls data, on Friday we saw a huge drop off in Friday’s University of Michigan consumer sentiment report, with around a third of respondents highlighting concerns around trade tariffs. If the soft data goes lower, then the Fed will try and get ahead of the curve. Let’s hear what NY Fed president Williams and Chair Powell make of the data this week, with keynote speeches due.
USD intervention grows a touch
However, with the USD strong and Trump making more noises on his disdain here. The question is, at what stage do we genuinely start to consider US Treasury intervention? The US really is the missing link to higher FX volatility, and if the US Treasury team, perhaps alongside the Fed, intervene then we can start talking currency wars with increased conviction, and this is where gold and silver go wild. And, not just because these metals are a clear hedge against negative real or nominal rates, but would stick out as a currency in its own right, with EM FX also working well in this environment.
We are not there yet, and the first port of call would be Steven Mnuchin putting intervention on the radar to scare off speculators. But for now, we look at the trigger points, and a trade-weighted USD 3-5% higher, with an increased rate of change, or, a USD index above 100,00 and eyeing a test of the January 2017 highs of 103.82 would raise FX vols. These levels would suggest we see the EUR/USD into 1.0500, with USDCNY into 7.25 and that would not go down well at the White House.
EUR/USD is tracking a few pips lower this morning, but, for now, the pair is holding below the 1.10 handle and the 1 August low of 1.1027. The technical traders are focused on the 1.0960 area, representing trend support drawn from November 2017 low, and a move through here would only encourage the market to increase short exposures.
Trading the range in the S&P 500
The futures open will offer insights, and the lack of any inspiring news flow over the weekend offers no real bullish catalysts in a market which saw the S&P 500 close unchanged, with the market, yet again finding sellers into 2940/5 zone. The 2945 to 2822 range is clear and defined, and when this breaks, it will get great attention.
US Treasury’s found small buyers in the front-end, and 10s and 30s unchanged at 1.49% and 1.96% respectively, but we expect a stronger move lower on the re-open. The 2s 10s curve remains inverted, and that suggests staying cautious, even if we are coming into a seasonally strong period for risk, with the S&P 500 historically working well in the period up to 19 September, where we tend to fade the strength into options exportation, with gamma sellers and corporate buy-back blackout a driver.
Here, I have aggregated all the moves over the past 10 years into one index, to best show the seasonality of the index. The (small) white circle where we are today.
The New Zealand Dollar tumbled across the board during the early parts of Tuesday morning after the Reserve Bank of New Zealand’s (RBNZ) dovish shift caught markets by surprise.
With the central bank abandoning its long-standing neutral stance on interest rates and signalling a possible cut, the New Zealand Dollar is likely to weaken further. This is already being reflected in the NZDUSD which dropped a staggering 100+ pips in a matter of minutes following the RBNZ’s dovish statement. Focusing on the technical picture, the currency pair is turning bearish on the daily charts with prices trading marginally below 0.6810 higher low as of writing. Sustained weakness below this level will signal further downside with the next key point of interest at 0.6750. Alternatively, if 0.6810 proves to be reliable support, prices have the potential to rebound back towards 0.6850 before resuming the downtrend.
NZDJPY knocks on 75.00’s door
The NZDJPY collapsed roughly 110 pips following the RBNZ’s dovish shift to trade around 75.00 as of writing. Prices are looking increasingly bearish on the daily charts with a breakdown below 75.00 opening a path towards 74.30. On the other hand, a rebound from 75.00 could send the NZDJPY back to 75.40.
EURNZD pushes above 1.6550
We see weakness in the New Zealand Dollar pushing the EURNZD higher in the near term. For as long as the New Zealand Dollar continues to weaken, EURNZD bulls will remain in the driving seat moving forward. A solid daily close above the 1.6550 is seen pushing prices higher towards 1.6730.
NZDCAD sinks towards 0.9100
The NZDCAD is on route to sinking lower if bears are able to secure a solid close below 0.9100. This pair has broken the bullish channel on the daily charts with bears eyeing 0.9100 and lower. A solid daily close below this point will most likely invite a decline towards 0.9000.
Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.
Traders are saying that a technically-based “Flash Crash” drove the U.S. Dollar, the Australian Dollar and the New Zealand Dollar sharply lower against the Japanese Yen early Thursday. A torrent wave of automated selling against the Yen sent the Aussie plunging to multi-year lows. The greenback declined against the Yen to its lowest level since late March 2019. The Kiwi spiked lower, but losses were limited.
According to Reuters, the Australian Dollar suffered some of the largest intra-day losses in its history amid a “drought of liquidity and a cascade of computerized sales.”
The daily chart shows that a one point the Australian Dollar was down 5 percent against the Japanese Yen and almost 4 percent versus the U.S. Dollar, before clawing back much of the losses as trading conditions calmed and humans intervened to stabilize the markets.
According to Ray Attrill, head of FX strategy at National Australia Bank (NAB), “Violent moves in the AUD and JPY this morning bear all the hallmarks of a ‘flash crash’ similar to that which befell the NZD in August 2015 and GBP in October 2016.”
Attrill went on to say, “The fact that over half the move down in both these pairs has since been retraced is testimony to today’s moves being first and foremost a liquidity event.”
Japanese Investors May Have Triggered the Moves
The daily USD/JPY chart supports the theory that Japanese investors who had been crowded into trades borrowing Japanese Yen to buy higher-yielding currencies, were forced out en masse when major chart levels were pierced. This chart shows former bottoms that failed this week at 109.770, 109.360 and 109.179. This left just one more level as support.
Flash Crash or Well-Played Short?
The major support according to the daily chart was the May 29, 2018 main bottom at 108.114. This chart showed that sellers had a clean shot at 104.600, which makes me wonder if it was actually a “flash crash” fueled by human or computer error, or a well-played strategy to break the Dollar/Yen. I tend to lean toward the side of a good trader or group of traders in this case. They saw opportunity and they seized it.
Even after surpassing 200-day SMA for the first time in seven-months, the NZDUSD couldn’t provide a D1 close beyond the same and is presently struggling to clear the 0.6865 barrier, which if conquered on a daily closing basis might fuel the pair to 0.6900 & 0.6920 resistances. However, the 0.6970-75 region can challenge the buyers past-0.6920, if not then the 0.7000 and the 0.7060 may grab market attention. Assuming the pair’s failure to cross the crucial SMA hurdle, the 0.6830 and an upward slanting TL figure of 0.6770 could play their roles of supports. Though, quote’s dip beneath the 0.6770 highlights importance of 0.6710-0.6700 support-zone and the 100-day SMA level of 0.6655.
Inability to sustain break of sixteen-month old descending trend-line drags the NZDJPY back to 77.50 resistance-turned-support but its slide below the same might not hesitate flashing the 77.20 & 76.30 on chart. Given the pair’s sustained downturn after 76.30, the 200-day SMA level of 75.70 & the 75.10 mark, including 50-day SMA, may please the sellers. Alternatively, pair’s reversal from current levels can push it towards 78.15 and the 78.50 resistances. Moreover, the 79.00, the 79.60 and the 80.00 might become Bulls favorite during the pair’s successful rise above 78.50.
AUDNZD’s refrain to register fresh lows can’t even portray its near-term strength unless the 1.0710-15 and the 1.0725 resistances are broke. If at all those numbers fall short of limiting the pair’s advances, 1.0755-60 and the 1.0800 can intermediate halts before fueling it to 1.0855 landmark to north. Meanwhile, the 1.0620, the 1.0600 and the 1.0585 are likely adjacent supports that can keep restricting the pair’s declines, breaking which chances of its plunge 61.8% FE level of 1.0540 can’t be denied.
Having bounced off the 0.6785, the NZDCHF again aims to confront the 0.6845-50 resistance-area that holds the gate for the pair’s upward trajectory to 0.6890. In case prices rally above 0.6890, the 0.6900 round-figure may act as a small halt prior to escalating the up-moves to 61.8% FE level of 0.6935 and then to the 0.7000 psychological-magnet. On the downside, break of 0.6785 can fetch the quote to 0.6745-40, which if broken could stretch the south-run to 0.6700 and the 0.6650 rest-points. Should Bears continue dominating sentiments beneath 0.6650, the 0.6600 & the 0.6575 may appear on their radars to target.
Even after bouncing off the 0.6500 round-figure, NZDUSD couldn’t clear the 0.6575-80 resistance-confluence, comprising 50-day SMA & a short-term descending trend-line, which triggered the pair’s pullback towards 0.6500 re-test. In case the pair refrain to respect the 0.6500 mark, the 0.6470 and the 0.6420 are likely following rests that can be availed but its slide beneath the same could highlight the importance of 61.8% FE level of 0.6345. Alternatively, a D1 close beyond 0.6580 can escalate the pair’s recovery to 0.6610 and then to another downward slanting resistance-line, at 0.6655. Given the pair’s successful rise above 0.6655, the 100-day SMA level of 0.6675 and the 0.6700 may please the buyers.
EURNZD struggles with 100-day SMA level of 1.7375 in order to justify its strength in targeting the 1.7410-15; though, pair’s advances past-1.7415 might find it hard to conquer the 1.7520 trend-line. Should prices surpass 1.7520 on a daily closing basis, the 1.7540 and the 50-day SMA level of 1.7600 can appear in the Bulls radar. Meanwhile, the 1.7260, 1.7200 and the 1.7155, including 200-day SMA, might offer immediate supports to the pair prior to dragging it to the 1.7115-05 horizontal-support. Assuming the quote’s dip below 1.7100, the 1.7020 and the 1.7000 psychological magnet could become sellers’ favorites.
With its repeated reversals from 72.30-20 support-zone, NZDJPY is likely to confront 100-day SMA level of 74.50 but its further upside can be restricted by nine-month old descending TL, at 74.80. If at all the pair manage to cross 74.80, the 75.50 and 200-day SMA level of 76.00 may be observed if holding long positions. On the contrary, 73.55 can serve as adjacent support, breaking which 73.10 & 72.70 might act as intermediate halts before dragging the pair to 72.30-20 again. However, pair’s plunge below 72.20 opens the gate for 61.8% FE level of 71.00.
Having smashed 50-day SMA, the NZDCAD is expected to run towards eight-week long resistance-line, around 0.8650, which if broken could propel the quote to 0.8690 and the 100-day SMA level of 0.8730. In case the prices keep rallying above 0.8730, the 0.8780 and the 0.8825-30 area can challenge the optimists. Let’s say the pair closes beneath 50-day SMA level of 0.8555, then the 0.8520 support-line figure becomes an important number to watch as break of which can flash 0.8450 & 0.8390 on the chart. Moreover, pair’s extended south-run after 0.8390 may have 0.8320 and the 0.8245, comprising 61.8% FE, as supports.
Today, we do have the ECB rate decision, so maybe it would be better to stay away from the common European currency. That is why I have two setups with the JPY. First one is the USDJPY, where the price created a head and shoulders pattern but failed to break the neckline. It was not easy though. The neckline was on the long-term up trendline. With this bounce, we do have a positive sentiment here.
Quite the opposite can be seen on the NZDJPY, where we still have a negative situation. Here, the price managed to break the neckline. Today’s upswing is just a normal pull-back, which will test the recent support as a resistance. As long as we are below the neckline, the sell signal is on.
OK, we cannot resist not to mention the EURGBP, especially with the setup like this one. EURGBP bounced from a horizontal resistance and the mid-term down trendline. They did that with a flag pattern and a double top formation. That is enough to go short here!
The new week starts for us with the analysis of the USDJPY, where we do have a nice bullish setup. That is something new in October as the 10th month of the year is so far negative for this instrument and up to date, is bringing us a strong decline.
It seems that bad times are over though. First of all, in the previous week, price bounced from the long-term up trendline (green). In addition to that, USDJPY drew a bullish price formation – Inverse Head and Shoulders pattern (yellow). That formation is already active and actually, was activated today, when the price broke the neckline (upper black). Price closing a day above that life will be a confirmation of a positive sentiment on this instrument.
As for the target, well… first we should break the resistance on the 50% Fibonacci and later we should aim for the highs from the beginning of October. Chances that we will get there are quite high.
While the 0.6615-20 is likely immediate upside barrier for the NZDUSD, the 0.6560 and the 0.6525 could confine the pair’s near-term downside. As a result, the 0.6620 and the 0.6525 could act as triggers to the quote’s following moves. In case the pair dips beneath 0.6525, which has higher probabilities, the 61.8% FE level of 0.6490 and the 0.6430 can please the sellers. Alternatively, pair’s successful trading beyond 0.6620 can avail 0.6670 as an intermediate halt before challenging the 0.6695 trend-line, which if broken might not hesitate fueling prices to the 0.6720-25 resistance-region.
In spite of conquering 32-month long ascending trend-line resistance, the EURNZD needs to close above 1.7600 in order to extend its north-run towards 1.7730 and the 1.7900 levels. Should the pair continue rising past-1.7900, the 1.8000 round-figure could hold the door for its surge in direction to the 1.8130 and the 1.8300 marks. Assuming that the pair fails to maintain its stand above 1.7600 on a weekly closing basis, then it can witness pullbacks to 1.7485 and the 1.7380 levels. Moreover, pair’s extended profit-booking after 1.7380 highlights the importance of 1.7230 and the 1.7110 rest-points.
GBPNZD also has to cross the 1.9700 TL on a D1 closing basis if it is to aim for the 1.9760 and the 1.9835 resistances. Though, break of 1.9835 might flash 2.0000 and the 61.8% FE level of 2.0120 on the Bulls’ radar. Meanwhile, the 1.9460 and the 50-day SMA level of 1.9365 may entertain counter-trend traders, breaking which 1.9150 and an upward slanting TL, at 1.9080, seems crucial. If at all the pair drops beneath 1.9080, the 1.9000 and the 1.8910 can be targeted if having short positions.
Even after bouncing off the immediate TL support, the NZDJPY couldn’t clear the 73.70 hurdle to north and may revisit the 72.80 support-line, which if broken might drag the quote to 72.30 and the 71.60 mark, including 61.8% FE. Given the pessimists rule sentiment past-71.60, then the 71.00 and the 70.00 could appear on the chart. On the upside, pair’s advances above 73.70 can look for 74.10 and the 50-day SMA level of 74.75 but the five-month old descending TL, at 75.40 could disappoint the optimists afterwards. Should prices rally beyond 75.40, the 76.30 and the 200-day SMA level of 77.10 might face the limelight.
Carry trade is the borrowing or selling of a financial instrument with a low-interest rate, then using it to buy another instrument with a higher interest rate. The trades will either be going short on the lower interest rate currency or going long on the higher interest rate currency, with the carry trades needed to be held for a prolonged period of time using leverage for enhanced returns and take advantage of interest rates spread between the two currencies.
The use of leverage with a broker to increase earnings multiples through interest rate arbitrage is considered to be a ‘risk on’ strategy, where investors will either consider the current economic environment to be positive for their position or, more importantly, for the economic outlook to be positive, supporting an interest rate diverging environment that enhances carry trade returns. The strategy is based on the evaluation of the economic situation of each country or financial zone.
Risk Aversion – How to Trade the Carry Trade?
The carry trade has been a particularly popular medium to long-term strategy within the FX world, with shifts in interest rates tending to be few and the opportunity to take long-term positions to appeal to investors and hedge funds.
Basically, carry trade is all about the interest rates differentials, and, more importantly, interest rates prediction.
Yet, for the retail investors, cautions must be taken into the account. While in an ideal world, where political stability persists and macroeconomic conditions have been supportive of carry trades, it is not always as simple as moving from a low yielding to a high yielding environment.
Economic shocks will be reflected within the FX world, sometimes far more quickly than in other asset classes.
Additionally, while central banks have a tendency to provide guidance for the financial markets, supposedly giving ample time to respond and position in anticipation of a shift in policy, some central banks are less interested in forwarding guidance than other. A surprise shift in policy by a central bank capable of eroding any returns made through a carry trade on a given day and even lead to heavy losses.
Risk aversion can also come about from natural disasters or war and not just from a shift in the policy outlook.
In summary, key risks to carry trade positions include:
Geo-Political Risk – A political event that will influence sentiment towards monetary policy and economic outlook for a given country, such as Brexit, sanctions, trade war and more.
FX risk – returns from interest rate differentials offset by exchange rate movements in the carry trade, leading to losses in spite of interest rate differentials favoring the carry trade.
Gearing risk – Losses resulting from unexpected movements that are exasperated by leveraged positions that could result in margin calls or even positions being stopped out by an exchange.
Interest Rate Risk – More of an issue when including compounding interest. Movements in interest rate differentials can have a positive or negative impact on returns, with a narrowing in differentials leaving returns lower than expected until the next interest compounding period.
And yet, although risk aversion can be a risk for carry trades positions, carry trades can come as a smart decision for a long-term investment or a trigger to buy/sell any instrument.
The most traditional carry trades have been the USD/JPY, the NZD/USD, NZD/JPY, AUD/USD and the AUD/JPY, with the EUR/USD coming into its own since the global financial crisis. There are others, including the Brazilian real and the Turkish Lira, with some more volatile exotics also on offer, but risk appetite will need to be particularly high and with some economies less transparent than others, carry trades into such exotic currencies come with significant risk. Although these pairs are at the highest level of popularity when it comes to carry trades, any currency or currency pair can be considered a carry trade transaction.
Interest rates spread between two countries can be the main catalyst for a strength of one currency over another currency.
Looking at today’s interest rate environment, the EUR and the Japanese Yen are amongst the preferred funding currencies, with interest rates sitting at or below 0%.
When looking at the recent moves in yields for 10-year U.S Treasuries, the material shift in sentiment towards the U.S economy and monetary policy outlook has seen the Dollar rally of late, with year-to-date losses having been all but wiped out in just a matter of weeks.
For those looking to take on carry trades, finding the right trading platform that offers the appropriate trading tools is key.HQBroker is one such platform that offers the trading of FX and CFDs, giving the trader the option to scalp, swing or take on longer-term positions that includes carry trades, with the use of leverage to enhance returns.
Every trader must research and understand the significance of carry trades prior to entering a transaction and at the exit of the transaction. Carry trades and interest rates differentials provide the volatility in the FX market and more importantly, provide the opportunity for a trader to execute a carry trade, with high odds of a positive return.
The last week was very eventful for the USDJPY. Apart from the technical analysis, positive sentiment was strengthened here by the rise of the global exchanges. In the last week, USDJPY broke three important resistances. In theory, that should be a strong buy signal. Let us see if the positive sentiment is still here.
First, let’s deal with those broken resistances that we mentioned above. First one was the neckline of the inverse head and shoulders pattern (red). The second one was the mid-term down trendline (orange). Those two, gave the price momentum to break the last one: upper line of the wedge pattern (green). After the breakout, the price formed a small rectangle pattern (yellow) and went higher – the proper buy signal as its finest.
Currently, the price is undergoing a small correction but it seems that everything is under control and we should see a further upswing. As long, as we stay above the yellow area, the current drop is just a small correction. Comeback below the yellow support, can potentially kill the demand here and be an invitation for the false breakout pattern, which can reverse the powers on the USDJPY. The second option is less likely to happen.