Japanese Yen Advances as Risky Assets Falter

Analyst picks for: 2009/04/22
Written by the DailyFX Research Team

Risk trends appear to have returned as catalysts for the Japanese Yen - the currency has moved higher to start the week as stock markets tumbled on renewed risk aversion. Indeed, a 30-day rolling correlation study suggests an -72% inverse relationship between the MSCI World Stock Index and the Yen’s average value against a trade-weighted basket of top currencies. Will the Yen continue higher as stocks decline, or will a record-setting recession see the bears return to dominance? Our DailyFX team offers their thoughts on trading JPY in the days ahead.

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Chief Strategist
Antonio Sousa
My picks: Long USD/JPY at 97.75 limit
Expertise: Global Macro
Average Time Frame of Trades: 1 Week

I expect the safe-haven U.S. dollar to outperform the Japanese yen exchange rate on speculation the U.S. Federal Reserve will be more aggressive than the Bank of Japan to promote sustainable growth and the export-dependent economy of Japan is more vulnerable to the current slump in global demand than other major economies. Technically speaking, the USD/JPY is trading slightly below its 200-day moving-average but finding support above a 3-month rising trendline.


Senior Currency Strategist
Jamie Saettele
My picks: Stay short USDJPY, move risk to 99, targets at 96 and 94
Expertise: Technical
Average Time Frame of Trades:

The 61.8% of 110.71-87.09 at 101 has held as USDJPY resistance. The next level of potential resistance is a resistance line drawn off of the July 2007 and August 2008 highs. That line is at 103.35 this week and decreases about 20 pips per week. The long term trend remains down and I am looking for a resumption of that trend. The downside potential is significant. Bears can move risk to 98.92.


Currency Strategist
John Kicklighter
My picks: Short CADJPY
Expertise: Combining Money Management with Fundamental and Technical Analysis
Average Time Frame of Trades: 3 days - 1 week

The yen crosses are still highly volatile and major trends have been put off their pace until fundamentals recalibrate the market's bearing on risk trends. My setup from last week was summarily stopped out with yet another trend break. CHFJPY was following a rising trend since the January swing low that was further support by a short-term Fib confluence and series of daily lows. And, though this pair was better insulated to risk trends than many of its counterparts, the pressure of holding such an active trend when risk aversion was on the rise proved too much. By Thursday, the intraday lows were reaching too far; and by Friday momentum had hit my conservative stops. Now, having to scan the yen crosses for a viable setup, it is important to first adjust expectations to current market conditions. Risk aversion has curbed traders interest in seeking out interest income; but this move has yet to evolve into a genuine reversal in sentiment. As such, we are left awaiting the next, major catalyst for risk appetite before we can expect to find direction. For CADJPY, the fundamental waves go beyond the global sense of caution and abondon. The Bank of Canada significantly lowered its projections for growth along with its surprise rate cut. Should the bank's monetary policy statement due tomorrow signal a shift to a more unusual approach (like quantitative easing or active market intervention), confidence in the Canadian dollar could be severely comprimised.

Turning the outlook for a lack of trend and impending event risk into a setup, I think it the higher probability setup is to look for this pair (and all yen crosses) to span the range of its nearly three-month mature trend. A deeper retracement of this steady advance requires a good entry point to help control the risk profile. The rebound to test the previous support in the rising channel floor is a good technical point; but considering 80.00/35 was previously a major pivot point going back to November and there is minor Fib congestion in the area. This even level will be my line in the sand; and a hard stop will be placed with a reasonable buffer with a preferable exit on a medium time frame bar close above this figure. My first target will be set equal to risk and above today's lows (as there is a 50-day SMA just below today's range). When the first target is taken, the second lot's stop will be moved to break even. We will have to break temporary support to meet the second objective just above 75.


Currency Strategist
Terri Belkas
My picks: Stay Long JPY
Expertise: Fundamentals Combined With Technicals
Average Time Frame of Trades: 1 Day - 1 Week

I've mentioned a few long JPY positions over the past week or so, including a short USD/JPY trade from 4/15 (triggered on 4/20, still open) and a short AUD/JPY trade from 4/20. With risk aversion alive and well throughout the financial markets due to uncertainty about the true health of banks, I think it's worthwhile to stay long JPY.


Currency Analyst
David Rodriguez
My picks: Short USD/JPY
Expertise: System Trading
Average Time Frame of Trades: 2-10 weeks

This is a direct copy of what I wrote last week, which remains unchanged:

Last week I was hawking a USD/JPY-short position, and my stance remains unchanged. The recent upturn in US and international equity markets is arguably unsustainable, as the S&P 500 has rallied over 25 percent in a single month. To put it in clearer terms, this is an annualized pace of gains of over 1000 percent. Though we closed out the week at the highs, I believe it is only a matter of time before we turn lower. Couple that with the fact that the USD/JPY trades at major resistance, and I think you have the makings of a good short. Risk will have to be admittedly loose, as this is a more medium-term position, but I would ideally place my first stop at 101.60 (the 61.8 percent Fib of 110-87. Targets are much lower and to be determined.

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