We've been speculating quite a bit about what event could trigger an unwind in carry trades...check out this article from FT: http://www.ft.com/cms/s/ac32a5fc-0ec...00e2511c8.html

It discusses a bill that will be introduced in the Senate next month that will "put pressure on the US Treasury to intervene in global markets if currencies become fundamentally 'misaligned.'" Legislators are going to new lengths to try to enact protectionist measures. I think if cooler heads don't prevail and this bill actually passes, it could serve as trigger.

NFPs has passed and the USDJPY hasn't chosen a direction on the number. Better than expected, but not far off the official consensus -especially given the recent number in intial jobless claims. We will have a second go at a dollar direction when the ISM manufacturing report hits the wires. This number could define the new dollar trend with so many majors coming up on major levels.

Setting it up, we may need a pretty big surprise to the upside to get a break higher since there is a 4.5 year high at 122.20. On the other hand, the pair is steadily trickling higher and that would be expected with the carry appeal this trade has sat on. Essentially, a break lower would require serious change in the FX markets risk profile and/or expectations of capital risk on a carry trade unwinding.

I'm currently long in the pair, but I will be prepared to exit should the trend channel break in the short term.

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Based on current price can you explain little bit. I am new to forex.
thanks

Hi all,

For some reason my graphs aren't posting. Here are my thoughts from my blog. The Fibo 38.2% retracement from February 2002 (Yen@135.00) to the low in January 2005 (Yen@101.67) hits 122 right on the dot. Surprisingly, this is exactly the same point at which Fibo 38.2% retracement from January 2005 (Yen@101.67) to the high in December 2005 (Yen@121.38) is now. The Dollar hasn't been able to break through the 122s during the last 3 years. If the USD is able to stay above 121 level, and if it breaks through 122 and is able to maintain the 122+ figure, I believe the pair will head higher towards mid/higher 120s.

the graph is there for your analysis. I would like to hear your thouhts.
Alex Kazmarck
http://spoteuro.blogspot.com

A dollar above 122 yen would mean that we have bounced from the troughs of Q1 and US growth would be considerably better while at the same time Japan continues to flounder.

Short USDJPY from 121.10, target 119.60 (above 119.48 May11th low), stop 122.10. Possible unwinding of carry trades. Also the month of June usually marks the end of the spring trends in the FX market, so a little bit of adjustment before the big boys head for the sunny beaches is what the market really needs. Timeframe for the move 1W. I admit it can easily go towards 118.50 if 119.50 breaks convincingly. All the best.

Hopefully this should work for you but the stop at 122.10 might be tight. On teh other hand if it takes it out chances are high yen could float to 123.50 before subsiding

The Bank of Japan is expected to keep rates unchanged and the USD/JPY seems poised to test the January 29 high at 122.17.

Go Long @ 121.80 limit
Profit Target @ 122.17
Stop @ 120.95

I think this is a high probability setup and I'm ready to trade it with a decent position size. However, things can easily go wrong. Let me know what could possible deny this trading setup. A break below 121.50? Carry Unwind? BoJ rate hike?

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I agree with Antonio's outlook on higher USDJPY. While we see a few stress tests in the carry trade (RBNZ intervention, speculation of a BoJ rate this summer), the draw of of a 4.0 to 7.5 perent annual return on some of the big carry names is just too attractive for many to pass up. This is especially true as traders try to make returns when volatility is so low and good trades dry up.

The profit target looks especially good in the short-term. Most of the time, when the market is testing a major high or low, the levels will be pushed in a last gasp before turning. So even if the trend doesn't turn out bullish in the long run, you can still take profit on the short term. Beyond 122.20, there are technical arguments on both side of the trade. For those looking for a turn, the monthly chart has a big 61.8% fib only a few points above the overall high. On the other hand, this is the most convincing of the very few technical levels easily read. For the bulls, a steady rising channel is pushing intently into the resistance. And price-derived indicators like Stochs and RSI are drifting in neutral, suggesting the slow building momentum into the bull channel could force a break.

For a short-term USDJPY trade, I wouldn't enter unless I got a better price (121.00-25) and then I would hold it until my target is reached at 122 or a 240-minute bar closed below the rising trendline.

For a longer-term trade, I would enter USDJPY on a daily close above 122.20, though this would obviously depend on what my price is. If it soars through this level, I wouldn't try to jump on board when a pull-back is likely to follow up.

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I agree fundamentally with John and Antonio, as price action and speculative sentiment continues to call for USDJPY advances. Yet it seems increasingly likely that we see a carry trade pullback in the coming days. Why? Markets are becoming increasingly skittish. Given bearish performance across highly speculative markets (notables include equities and precious metals), implied volatility across these risky instruments is starting to pick up.

The charts below show the relationship between the USDJPY and the VIX index. For those unfamiliar with US equity markets, the VIX is the Volatility Index for the S&P 500. Notice that the VIX took off in late February as US equities shot lower, which unsurprisingly coincided with a strong USDJPY drop.

This happened again recently, with a jump in volatility/nervousness leading to a USDJPY pullback. Yet markets are currently ignoring the fact that the VIX once again moved higher through yesterday trade. Could we possibly have the JPY catch up with volatility? I think it's entirely possible, and this would prevent me from selling JPY through the short term.

The second chart below shows the strongly negative correlation between the VIX and the USDJPY from year-to-date. In case you're wondering about historical averages, a 20+ year study shows a much weaker relationship between the two. Yet the context of the carry trade and strong performance of risky assets has left the pair much more closely linked in 2007.

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Our previous USDJPY trade worked out just fine and since the same fundamental factors remain on play we think we can do it again. Over the past week, the interest rate differential between the US and Japan has widened significantly and dollar strength will probably continue. However, I recommend waiting for a small retracement since the dollar looks a bit expensive.

Go long @ 122.01 limit
Profit Target @ 122.44
Stop @ 121.70

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I showed this to Antonio earlier. Thought it a good idea to put it on the forum. Big contrast for the Dollar Index between the weekly chart with two years worth of data and the monthly chart with 30 years. There is clearly a big falling trendline on the weekly chart which should present problems for the dollar.

I think this is useful for USDJPY since the pair is coming up on its own resistance in a four-year high. There is also a big 61.8% fib of the 135.17-101.77 bear wave at 122.40. While a few of the other majors have room to breathe before reaching big trendlines (EURUSD 1.3250 and GBPUSD 1.9600), USDJPY is being held back now. If USDJPY holds its resistance and GBPUSD and EURUSD get cozy with their trendlines, we will probably see a big drop in volatility just before a big indicator or news event triggers a big dollar breakout or retracement. I'm going to be ready for it with position scenarios for USDJPY, GBPUSD and EURUSD.

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Good catch, John. I found the same trendline, with the technical situation looking dour for the DXY through the coming days. Looking at the daily chart, you see that the Greenback has turned off of the downward-sloping line.

Indeed, the second attached chart below will show that this coincides with a turn off of the 50.0 fib of the January-February tumble, and yesterday's close came below the currency's 100-day moving average. Add oscillators in increasingly oversold conditions, and you're most likely going to see a dollar decline in the coming days. Look to individual currency pairs for how you might want to trade dollar weakness.

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Hi, your correlation studies are multiyear studies, USDJPY is going to shoot from 122 to 125 within weeks, with US yield rising above 6%.
Looking at long term correlation to trade short term trends seems like a substitute for suicide.

According to the FXCM SSI the ratio of long to short positions in the USDJPY stands at -2.00 as nearly 67% of traders are short. Yesterday, the ratio was at -2.21 as 69% of open positions were short. In detail, long positions are 13.5% higher than yesterday and 22.9% weaker since last week. Short positions are 2.5% higher than yesterday and 26.8% stronger since last week. Open interest is 5.9% stronger than yesterday and 1.9% above its monthly average. The SSI is a contrarian indicator and signals more USDJPY gains.


How to trade this?

Go long @ 122.15 limit
Profit Target @ 123.15
Stop @ 120.50

I will keep you updated in the outcome of the trade.