Trading Idea of the Week: Dollar vs. Japanese Yen

Trading Idea of the Week: Dollar vs. Japanese Yen

Invest Diva is eyeing the Japanese Yen for a potential trade against the US dollar. We’re just about to do a 360 Invest Diva Diamond Analysis* on this hot pair. At any point if you feel you’re lost in translation, check out the Forex Coffee Break with Invest Diva’s online education course. It has been called the most comprehensive and entertaining video education course on the web.

Fundamental Points

The first week of November brings more than post-Halloween hangover. It brings together top tier economic indicators as well: three rate decisions, four employment reports, and a special appearance of the governor of Bank of Japan, BOJ’s Mr. Kuroda-san in Osaka Tuesday morning (Japan’s time) which pushed the Japanese currency upward, but not much. Keep in mind that a strong Japanese currency is NOT good for Japanese economy.

Half a year ago, Kuroda-san unleashed record monetary easing. Now the economists see the bank of Japan failing to meet its inflation target, underscoring the case for stronger steps to revive the economy. As predicted, Kuroda-san said Tuesday morning Japan’s central bank will not hesitate adjusting monetary policy if risks to economy threaten achievement of its 2 percent inflation target. He also said “U.S. and Chinese economies, which are important in terms of the impact on Japan’s economy, will continue to recover… albeit some risks remain,”

The BoJ are struggling to convince the investment community that a 2% inflation target is realistic, with Abenomics rapidly losing its’ lustre. Progress using this growth strategy has been slow and two options present themselves to MR Abe, devalue the Yen with another tranche of aggressive asset purchase and corporate tax cuts or risk a very sharp economic slowdown.

As for the US dollar, yesterday’s discussions from the US saw a great deal of posturing on the future of QE, and a distinct lack of cohesion between the FED’s members. With the FED’s Bullard stating that “The December taper still remains a possibility” and Rosenberg saying that policy should remain aggressive whilst the economic situation remains challenging. Further adding should the taper occur in December or April it was all marginally irrelevant and would not cause a great deal of impact to the governments’ balance sheet. Perhaps concern lies with the value of US equities and not with the US balance sheet.

Technical Points

Looking at the USDJPY daily chart was what actually gave me the idea of picking this pair for this week. Guess what I suspect is in the middle of formation: A Double Top!

I backed up this discovery by adding the Ichimoku indicator. It shows that the pair is being held by the upper band of the prevailing Ichimoku cloud, which usually acts as resistance.

While Kuroda-san was speaking Tuesday morning Japan’s time, the pair tested below the lower band of the cloud. If the pair closes below the cloud… We all know what that means: it could open doors for more declines toward the neckline of the Double Top pattern. So we should just wait for a confirmation at this point before making any hasty decisions.

To back up the downward pattern observation on USD/JPY, I also checked in with the US Dollar Index which measures the value of USD against a basket of major currencies. The USD itself also appears to be maintaining a bearish movement and trapped in a downtrend.

Sentimental Points

Currently the ratio of long to short positions of retail traders gauged by the Speculative Sentiment Index, stands at – 2.36 as 70% of traders are long. This index is believed to be a contrarian indicator, and suggests a move against the trading crowd. The fact that the majority of the traders are long gives signal that the USDJPY may continue lower.

Overall & Capital Points

So what do we do with this whole bunch of information? As you hopefully have noticed, I’m eyeing the Dollar-Yen for a potential bearish position.

There are two possible scenarios:

1-    Sell at the lower band of the Ichimoku cloud at 98.191 and take profit at the neckline of the double top formation at 97.250. Set your stop loss at the peak of the Double Top 98.939 or a past resistance at 100.376.

2-    Wait for the confirmation of the Double Top and enter the market at the neckline at 97.250. Take profit at the bottom of the Double Top formation at 96.691. Set your stop loss at the lower band of the prevailing Ichimoku cloud.

Invest responsibly!

* Invest Diva Diamond analysis is a trading strategy used both in the book Invest Diva’s Guide to Making Money in Forex published by McGraw-Hill, and the Forex Coffee Break with Invest Diva’s education course.