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A classic game of two halves for the USD/JPY

Anna Coulling
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USD_JPY_weeklyFor the USD/JPY, 2014 could best be described in football terms as a game of two halves, when viewed from almost every perspective, and perhaps the most descriptive timeframe to consider is the weekly chart for the pair. And in considering the chart, it also highlights the broader issue from a trading perspective of the need to have an array of trading strategies to take advantage of the prevailing market conditions.

The first half of the year was characterized with narrow spreads and low volume, with the pair trading in a tight range from February through to the late summer, testing the 100.60 price level to the downside, and the the 104.00 level to the upside, with each test of support and resistance holding firm throughout this period. This becalmed phase of price action was also confirmed with the associated volumes, which duly declined steadily coupled with volatility draining away, with the upper region of the price resistance defined with the pivot highs of April and August. This phase of price action was a perfect one in which to apply non directional trading strategies. However, for directional traders (as I wrote at the time) this was the ‘ultimate patience trade’, where patience would be rewarded with a breakout in due course, which has since proved to have been the case.

Since late August the price action could not be more different, with the sustained move higher of the last few months, propelling the USDJPY dramatically upwards and surging towards the 120 region, with volumes increasing, coupled with wide spread up candles. Whilst the fundamental drivers are well documented, the associated price action and volume tell their own story, with a market rising on rising volume and confirming the bullish sentiment for the pair in this timeframe. A classic example of volume price analysis in action. Given this strong picture, and with last week’s volume also confirming the bullish sentiment, we can expect to see the pair continue higher and on to test the 120.00 area and beyond in the medium term.

Moving to the currency strength indicator on the left of the chart, here we can see the Japanese Yen (the purple line) continuing to move deeper into the oversold region, and with some way still to go before reaching a deeply oversold position. At the top of the indicator, we can also see the US dollar (the red line ) is increasingly deeply overbought, and suggesting we may see a reversal in the medium term.

This classic chart raises the issue of mapping trading strategies to market conditions. For ‘directional only’ traders, the first half of the year was a period where patience and yet more patience was finally rewarded. However, for those traders embracing a range of strategies to suit market conditions, it presented a host of range trading opportunities based on both vanilla and binary options, where a lack of volatility coupled with an extended phase of narrow price action, (all confirmed with volume or rather the lack of it), offered perfect conditions for such an approach.

For today, with a Bank Holiday in Japan, this may be another where the USDJPY will once again trade in a narrow range, albeit over much shorter period this time around! Longer term, expect to see further bullish momentum for the pair, but with the USD now looking increasingly overbought and the yen moving ever deeper into oversold territory, we can expect to see a reversal in the medium term, and perhaps early in the new year with this duly reflected in equity markets after the Santa Claus rally in equities.

Finally, with the snap election now called for the 14th December, this is perhaps the only significant event on the immediate horizon. The market is expecting a further four years for the current administration (albeit with a reduced majority) and provided this indeed is the outcome, the USDJPY should continue higher. Meanwhile last week’s CFTC data reported the gross short yen positions increased by over 9,000 contracts to 139,000, adding further to the current bearish sentiment towards the Japanese yen.

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