Finding Opportunities In Yen Crosses After Global Rate Cut Drives Volatility

Daily Forex Technicals | Written by DailyFX | Oct 08 08 14:12 GMT |

The world's largest central banks dealt the carry trade a major blow this morning by announcing a joint rate cut. As the proxy funding currency for this popular trading strategy, the increased volatility and reduced returns have sent the yen on an impromptu rally. Now with trends revived and risk ballooning, the need for a sound strategy is imperative. To see how our DailyFX Analysts are positioning with markets in turmoil, read on.
Senior Currency Strategist - Jamie Saettele

My picks: Stay short USDJPY, move risk to 103.30, target below 95.71
Expertise: Technical
Average Time Frame of Trades: 1 Month

Last week for the Yen pick, I wrote that "the USDJPY is still in a range. I favor the downside as long as price is below the trendline from the 110.71 top. However, failure to continue lower through 103.50 does not instill confidence in the bearish bias." Moving risk to 103.30 locks in a couple hundred pips but the larger target is below the April low.
Currency Strategist - John Kicklighter

My picks: Pending CHFJPY Short
Expertise: Combining Money Management with Fundamental and Technical Analysis
Average Time Frame of Trades: 3 days - 1 week

The fundamental environment in the currency market has been shaken violently over the past 12 hours. In an effort to stabalize global markets, major central banks have took the unprecedented effort of a joint interest rate cut. It is simply coincidence that this happens on the same day that we are looking through the yen pairs for a potential setup. For the carry trade, this move looks to reestablish balance in investor confidence (though the market will have to tell us whether this will be the end effect or not); but it also lowers the return on the carry trade - further tipping the scales on the necessary return needed to offset its risk. As such, most of the yen crosses have plunged in response. Considering this was such an aggressive move in response to an exogenous market even, it is dangerous to chase a trend that is bourne of temporary factors. Therefore, I am looking at a pair that still has a technical hurddle to cross and therefore will really depend on a new trend: CHFJPY.

Support is centered on the 38.2 percent retracement of the September 2000 to July 2008 bull run at 87.50. This is the technical line in the sand that is holding back a greater bear run. As such, I'll wait until there is a daily close below this key technical (perhaps even below 87.00) before considering a short. Any position taken will have a wide stop (to account for the high volatility) and my targets will be staggered to increase the probability of a profitable trade. The first objective will match the risk taken, and the second will be more aggressive. To secure a profitable trade, the stop on the second lot will be moved to breakeven when the first half takes profit.
Currency Analyst - David Rodriguez

My picks: Stay short USDJPY
Expertise: System Trading
Average Time Frame of Trades: 2-10 weeks

On Monday I reiterated my preference to sell the USDJPY, and given ongoing market turmoil, it seems likely that we can see the pair continue to tumble through the near term. In fact, the US Dow Jones Industrials Average is set to open sharply lower despite coordinated central bank rate cuts, and there seems little in the way of further Dow declines.
Currency Analyst - Ilya Spivak

My picks: USDJPY Short (Pending)
Expertise: Macro Fundamentals, Classic Technical Analysis
Average Time Frame of Trades: 1 week - 6 months

Gauging the markets' response to various forms of stimulus over recent days, it appears traders have settled on monetary easing as the favorite confidence-boosting measure. Price action handsomely rewarded the RBA yesterday as Glenn Stevens and company slashed rates by 100 basis points: US index futures gained, some European exchanges actually managed to close in the plus column, and safe haven assets from Treasuries to the Yen declined. Today offers a counterpoint, as traders continued to sell stocks aggressively despite a new liquidity-boosting scheme from the Fed, a $22 billion capital injection from Australia and Japan, and a UK bank rescue plan. This puts the need for meaningful near-term central bank action in sharp relief, father fueling speculation of a coordinated rate cut in the near term. Should this happen, it is likely to produce a flash of exuberance that will send both stock markets and USDJPY higher. Technically, the longer-term bias in USDJPY favors a bearish outlook after the pair broke down out of a Rising Wedge formation that characterized price action since March. Look for a corrective rally to get short, ultimately targeting a test of the 2008 low at 95.71.
Currency Analyst - John Rivera

My picks: Short EURJPY
Expertise: Fundamentals Combined With Technicals
Average Time Frame of Trades: 1-2 Days

I am still bullish the Yen crosses and last week it paid off well. Yet, I am more cautious this week, especially after the coordinated rate cut by the central banks. Nevertheless, I am sticking with the trend especially after the ECB lower rates by 50bps which should weigh on the Euro once markets digest the historic actions of today. Despite the efforts today, we still saw Dow futures trading lower after a spike higher and European stocks give back gains. Therefore, risk aversion is still prevalent in the market and should remain supportive of the Yean crosses. Target 131 the June, 2005 low.
Currency Analyst - David Song

My picks: Short NZD/JPY
Expertise: Fundamentals Combined with Technicals
Average Time Frame of Trades: 2 - 10 Days

Despite the coordinated efforts by the central bank, the flight to saftey among investors has certainly increased the appeal of low-yielding currencies, and I anticipate the rise in risk aversion to continue to benefit the Japanese yen. On 9/22, I noted that the underlying downtrend for the NZDJPY would lead the pair lower, and anticipated that the pair would work its way down towards the 9/16 low of 67.21. In fact, the kiwi-yen has fallen through key support levels recently, and I expect the downward momentum to carry the pair lower over the week. I anticipate fading risk sentiments to drive the pair below 56.50 over the next few days, and I anticipate the NZDJPY to test the 9/5/02 low of 54.64 for support on its way to the downside.

DailyFX

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.