Business News: When Will The Yen Crosses Finally Break From Congestion At Multi-Year Lows?

Daily Forex Technicals | Written by DailyFX | Feb 04 09 14:59 GMT |

As the primary gauge of risk in the currency market, the Japanese yen has lowered expectations for volatility and direction for the entire market as the crosses carve very mature bands of congestion. However, the potential for an sudden shift in activity is still extremely high with recent ranges developing at multi-year (in some case record) lows. When should we expect a breakout? What could be the catalyst for such a drive? What direction will the market ultimately take? Our DailyFX analysts offer their outlooks below.

Chief Strategist - Antonio Sousa

My picks: Take profits on Short AUD/JPY
Expertise: Economics and Behavioral Finance
Average Time Frame of Trades: 1 month

I have been short AUD/JPY since the beginning of October on speculation that high yielding commodity currencies would be vulnerable to a lethal mix of economic slowdown, risk aversion and de-leveraging in the financial sector. However, today at 9AM ET, I decided to close this position and take more than 2000 pips in profits. In fact, even though there is some potential for the Australian dollar to drop a little bit further against the Japanese yen, the risk/reward ratio of this trade is now clearly skewed to the upside. So, I’m now flat in the AUD/JPY but will probably look for opportunities to sell it a bit higher since I still think the macro environment favors more losses in carry trade sensitive currencies.

Senior Currency Strategist - Jamie Saettele

My picks: Staying long EURJPY, against 113, target 122
Expertise: Technical
Average Time Frame of Trades:

I wrote yesterday that "the EURJPY is holding above its January low of 112.04 and I expect a larger bounce in order to correct the decline from 131.08. Resistance begins at 122 although a rally above 119.62 is expected at minimum." Price dropped to 114 this morning but has bounced. The EURUSD pattern is bullish as long as price is above 1.27, which helps our cause with this trade.

Currency Strategist - John Kicklighter

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

I have been watching the yen intently for weeks now; and my interest has certainly not waned with time. In fact, as the crosses maintain their base, the potential for a major shift in this currency (and possibly market-wide sentiment considering the yen's correlation to general risk trends) grows. Looking at my pick for last week, I was focusing on risk intensity through NZDJPY which was developing a short-term, counter-trend wedge formation. I was looking for a short-term reversal from seven-year lows; but a spike high above resistance would whip me in and out for a loss. In retrospect, this was perhaps an attempt to find a broad trend in a pair that has liquidity and therefore tout among the yen crosses. So, this week, I'm turning back to the originator of yen interest - USDJPY - to gauge overall market sentiment and direction. Fundamentally, this pair is the second most liquid in the currency market, backs the two largest economies in the world and is comprised of the two primary safe haven currencies of the past six months. This gives the pair an indelible link to the most encompassing driver of price action for the markets while also allowing for a weight and stability that won't make it susceptable to false breakouts.

Forecasting when risk trends will shift and in which direction is highly speculative and therefore something I want to avoid when trying to be objective and ready to jump on a new trend. Potential triggers for USDJPY price action are regular scheduled pieces of event risk like the US non-farm payrolls; but a genuine trend development will come on a broader shift in sentiment throughout the market. Defining when the market is on the move for direction could be somewhat more straightforward. The pair has developed a range between 87.15 and 91.05 for the past month and a half. A confirmed (higher time frame) close above or below these boundaries can trigger stops and limits and help build momentum. Ultimately, a rise in fear and drop in USDJPY would likely develop the most aggressive, initial follow through; but already at multi-year lows, it is important to realize that this pair is already extended.

Currency Analyst - David Rodriguez

My picks: Flat the JPY for now
Expertise: System Trading
Average Time Frame of Trades: 2-10 weeks

My overall bias remains bullish the Japanese Yen, but extreme volatility as of late has really made it difficult to remain long the JPY against currencies such as the Euro and the British Pound. My stance is thus far unchanged, but I have already taken profits on a recent EUR/JPY short and do not believe that now is a good time to go short once again. Ideally I would have taken note of the EUR/JPY's sharp reversal off of the 61.8 percent Fibonacci retracement of the 119.60-113.20 move at 117.00, but I clearly missed that trade and will not chase the price. Right now I'll watch for a break of 113.20 or a rally to a better selling point.

Currency Analyst - Ilya Spivak

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

I originally sold USDJPY as the pair broke below a triangle formation and the swing low from late October. Recent trading has seen the pair confined to a well-defined range between 0.8850 and 0.9120. With USDJPY still within the boundaries of a downward-sloping established in mid-July, the bias remains convincingly bearish. Remain short targeting 84.25, the record-lowest monthly close from 04/1995.

Currency Analyst - John Rivera

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

My long USD/JPY trade last week was initially profitable as price action would reach as high as 90.70, but the 20-Day SMA continues to be formidable resistance for the pair and I said that if the technical level held then it would be a time to take profits. The pair appears poised for a breakout as Bollinger bands have started to converge and I believe that the downside risks are much more limited for the pair as it stands near 13 year lows. However, with the pair making lower highs four days in a row and with the U.S. NFP report ahead I am taking a bearish bias over the short term. Nevertheless, a breakout to the upside is a reasonable expectation and a move above the 20-Day SMA would change my bias.

Currency Analyst - David Song

My picks: Stay Short GBP/CHF
Expertise: Fundamentals and Technicals
Average Time Frame of Trades: 2 - 10 Days

Expectations for lower borrowing costs paired with forecasts for a deepening recession in the U.K. continues to favor a bearish outlook for the British pound, and the GBPCHF is likely to hold its downward trend over the near-term as the economy heads into its worst recession since World War II. After reaching a high of 1.8706 in December, the pair fell to a low of 1.5124 on 12/29, and the lack of momentum to break above 1.6900-10 (50.0%Fib) continues to favor a bearish forecast for the pair. I will maintain my target for the January low of 1.5364 for the time being however, as market participants expect the Bank of England to conclude its easing cycle this month and adjust their outlook for future rates, we may see the pair bounce higher, but I will remain bearish against the pair as long as price action holds below the 50.0% Fib.

Currency Analyst - Joel S. Kruger

My picks: Buy GBP/JPY @131.00, for 141.55; stop at 124.90
Expertise: Technical Analysis
Average Time Frame of Trades: 1-3 Days

The market has been confined to an intense downtrend over the past several months with the cross rate trading to fresh life-time lows by 118.85 on 23Jan ahead of the latest minor bounce. However, recent price action has been quite constructive with the market putting in a fresh higher low on each day in the preceding week and refusing to rollover after putting in a bearish reversal day on Monday of this week. Additionally, it is worth noting that the lifetime lows by 118.85 have directly coincided with former trend-line-resistance (30Oct high) now turned support. Although weekly studies remain in oversold territory, the weekly RSI looks to be on the verge of a positive cross for the first time since March 2008 where we saw a 20 big figure move to the upside. Positive crosses in the RSI on the weekly chart have been few and far between over the past 20 years and each time, the bullish signal has yielded a major shift in the trend. The one exception was March 2008 where we still saw significant upside (aprox. 20 big figures) before bear trend resumption. As such we recommend looking to buy the cross on a break above the previous weekly high.

Fundamental Catalyst - The major drivers of price action on this cross over the past several months have been risk aversion and ongoing deterioration within the UK economy. However, we contend that we are now at an inflection point after starting to see some early signs of a potential shift in the broader market sentiment and UK fundamentals. While global equity prices continue to show weakness, there is no doubt that the rapid declines seen in 2008 have abated and deferred to a more consolidative form of price action. Additionally, UK data over the past few weeks has started to do something that has dramatically improved investor sentiment towards Sterling. Data out of the region has started to come in better than consensus estimates, often indicative of a base. As such, we view these developments as net positive for Sterling/Yen and combined with the oversold technical outlook, should make a compelling case for the establishment of fresh long positions by historical lows.

DailyFX

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