USD/JPY Flying Too High

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USD/JPY Flying Too High

If you missed out on the fly up, you may be able to make some dough on a pullback. While many of us in the US were taking care of some turkey business during the Thanksgiving holiday last week, a major pair was dancing upward on the forex dance floor, breaking several boundaries*. I’m talking about the US dollar vs. the Japanese Yen, USD/JPY.

Will the pair continue its fly up? I’m thinking yes. Will it pull back a bit before it shoots back up? Quite possible. Here is why, and how you could earn some pips during this possible scenario. Get ready for a 360 Invest Diva Diamond analysis.

Fundamental Points

USD:  On “Cyber Monday” the ISM manufacturing data proved markedly better than expected, causing the rumor mill to stir once more about the timeline for the Fed’s tapering. This week is very data heavy for the US and if it all comes out in a positive light then there is an outside chance that QE could be tapered this side of the New Year, but we still find that to be an unlikely scenario. 

Looking ahead to this week, the big numbers out of the US on New York time are going to be:

Wednesday:  the ISM Non-Manufacturing PMI and the Beige Book. The ISM short for Institute of Supply Management could push the USD lower if the Purchasing Managers’ Index (PMI) is lower than expected. The Beige Book will be the best indicator of the Fed’s tapering intentions ahead of their meeting on the 17th of the month.

Thursday: Unemployment Rates and Gross Domestic Product (GDP.) Needless to say, if the number of people who filed for unemployment insurance for the first time in the past week drops, that will push the USD higher. We look for the unemployment rate to move back down to 7.2%, after impacts from the government shutdown in the October report resulted in an increase in the unemployment rate to 7.3%.

The GDP reading will be the last before the Fed’s meeting this December. If the reading meets expectations of 3.1%, this will be the best GDP print since the spring 2012.

Friday: Nonfarm payrolls number (NFP.) Combined with the Beige Book and the GDP reading, this will certainly set the tone in regards to speculation of a December taper.

JPY: Japan hinted at more QE yesterday, which has forced the Yen back to its year to date lows against the Dollar and is likely to move further once it gets some large options barriers out of the way.

Technical points

The USD/JPY pair has been moving upward, well above the Ichimoku cloud, scratching the upper band of Mr. Bollinger. We all know what a Bollinger scratch means: it’s time for the pair to go back to the middle band. To top that, the 14-day period RSI is above 70, which is the overbought zone.

Since all lines of Mr. Ichimoku are moving upward, we could expect more gains in a longer term, but for now, there could be a potential pullback.

Sentiment Points

If you zoom into a shorter time-frame, you’ll notice that the speed of temporary pullback getting faster. On a certain broker’s platform, more traders are shorting the pair. We could use this as a contrarian indicator and expect more gains in the near future.

Overall Scenario

After going through all the above analysis, a possible trading strategy is to wait for the confirmation of a temporary pullback to the middle of the Bollinger Band, which could fall around the 23% or 38% Fibonacci levels depending on the pair’s movement speed. Then enter a long position and expect the pair to move back up to the highs of May at 103.698 and more.

A different, shorter term scenario could be to ride on this temporary pullback and short the pair, taking profit once Fibonacci holds.

Capital Points

Always set your stop loss and leverage in accordance to your tolerance of risk. A good level for your stop order in a bullish position could be one Fibo level lower than your entry order. Your limit order levels could be any higher Fibo levels and previous resistance levels at 103.698 and 108.298 if the Japanese QE takes place.

You are truly awesome if you read all the way down to here. Just in case you have been scratching your head along your read thinking I’m speaking some sort of a foreign language, you should get your bones over to Forex Coffee Break with Invest Diva’s education course right now, and become a Forex Diva in less than five hours.

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* “Forex dance floor,” and “breaking boundaries” are Invest Diva metaphors 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 courses.