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Trade Update: Positioning for US Dollar and Japanese Yen Breakdowns

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Article summary: Sharp swings in US Dollar and Japanese Yen pairs have made for difficult trading conditions, but we believe our sentiment-based strategies may do well selling USD and JPY losses.

It’s been a challenging week for our sentiment-based trading strategies, as pronounced choppiness in the Japanese Yen and US Dollar currency pairs have forced modest losses in key trades.

Yesterday we wrote that our trading strategies stopped and reversed on the US Dollar and Japanese Yen as it seemed both currencies were in the midst of a larger comeback against the Euro and other counterparts. Yet the JPY is back on its heels as the USDJPY makes a run at the critical ¥100 mark.

Our systems are now mostly flat the Japanese Yen on the sharp reversal in price action:

forex_trade_update_trading_yen_and_dollar_breakdown_body_Picture_5.png, Trade Update: Positioning for US Dollar and Japanese Yen Breakdowns

Screenshot of the strategy dashboard available on DailyFX PLUS

Our purely sentiment-based Momentum2 has proven particularly susceptible to price choppiness as it has gone both long and short the JPY and USD through the past week of price action. Our volatility-friendly Breakout2 system has proven slower to react to various price swings—it typically uses tighter stop-losses and is less likely to stop and reverse within short periods of time.

On Monday we wrote that we likewise liked Breakout2 trades on the Japanese Yen pairs as well as the Euro/Australian Dollar. We still like breakout trading on the JPY as volatility expectations have surged. Past performance is NOT indicative of future results, but breakout trading often works well when our “Volatility Percentiles” are above 75% in a given currency pair.

See the table below for an updated breakdown of volatility and trading biases:

forex_trade_update_trading_yen_and_dollar_breakdown_body_Picture_6.png, Trade Update: Positioning for US Dollar and Japanese Yen Breakdowns

There are key levels to watch on Japanese Yen pairs as well as the Euro/US Dollar. See our charts below for important support and resistance levels that could determine the next steps in these important currency pairs:

Key Levels on the Euro/Japanese Yen Currency Pair

forex_trade_update_trading_yen_and_dollar_breakdown_body_Picture_7.png, Trade Update: Positioning for US Dollar and Japanese Yen Breakdowns

Chart source: FXCM’s Trading Station Desktop, Prepared by David Rodriguez

Euro/Japanese Yen: The pair hit fresh multi-year highs just two weeks ago but has since found key support at the 50% Fibonacci retracement of the April rally at ¥125. That becomes critical support and the level at which we would change our currently bullish bias. Price resistance is now the multi-year high of ¥131.

Breakout2 is currently flat, but we’ll likely take its next long position.

Key Levels on the Euro/US Dollar Trade

forex_trade_update_trading_yen_and_dollar_breakdown_body_Picture_8.png, Trade Update: Positioning for US Dollar and Japanese Yen Breakdowns

Chart source: FXCM’s Trading Station Desktop, Prepared by David Rodriguez

Euro/US Dollar: A break above important resistance at $1.3100 helps confirm the Euro’s reversal higher, but the pair has subsequently stalled at a key 61.8% Fibonacci retracement of the past week’s decline at $1.3125.

Breakout2 has already taken a long position on the pair, though it’s important to note that relative volatility expectations are somewhat low for the EURUSD. We prefer watching for the nextMomentum2 long position in said pair.Price resistance is at $1.3200, while resistance-turned-support stands at $1.3100 and the psychologically significant $1.3000 mark.

Key Levels on the Euro/US Dollar Trade

forex_trade_update_trading_yen_and_dollar_breakdown_body_Picture_9.png, Trade Update: Positioning for US Dollar and Japanese Yen Breakdowns

Chart source: FXCM’s Trading Station Desktop, Prepared by David Rodriguez

US Dollar/Japanese Yen: After stopping us out and reversing direction, the Japanese Yen is once again falling sharply (USDJPY rallying) towards significant lows at ¥100 (USDJPY highs). The psychologically critical level is obvious price resistance, and the fact that there’s little in the way of said price level makes a test likely in the coming trading sessions.

Support stands at the 38.2% Fibonacci retracement of the April rally at ¥97.10, which likewise coincides with a key reaction low. Our bullish bias would change if the pair breaks below the 61.8% retracement of the same move at ¥95.40. We’ll look to the next Momentum2 and Breakout2 long trades in the USDJPY.

Wrapping things up: Recent price action has made for challenging trading, but we can’t expect strategies will continue racking up the massive gains that they had achieved last week. We still like Breakout2 trading across key pairs, though sharp gains in volatility will reduce our leverage on said trades. Much the same can be said for Momentum2 trades for the US Dollar.

Automate the Momentum2 trading system via the FXCM Apps store

Automate the Breakout2 trading system via the FXCM Apps store

forex_trade_update_trading_yen_and_dollar_breakdown_body_1a.png, Trade Update: Positioning for US Dollar and Japanese Yen Breakdowns

Written by David Rodriguez, Quantitative Strategist for DailyFX.com

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Analys från DailyFX

EURUSD Weekly Technical Analysis: New Month, More Weakness

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What’s inside:

  • EURUSD broke the ‘neckline’ of a bearish ‘head-and-shoulders’ pattern, April trend-line
  • Resistance in vicinity of 11825/80 likely to keep a lid on further strength
  • Targeting the low to mid-11600s with more selling

Confidence is essential to successful trading, see this new guide – ’Building Confidence in Trading’.

Coming into last week we pointed out the likelihood of finally seeing a resolution of the range EURUSD had been stuck in for the past few weeks, and one of the outcomes we made note of as a possibility was for the triggering of a ’head-and-shoulders’ pattern. Indeed, we saw a break of the ’neckline’ along with a drop below the April trend-line. This led to decent selling before a minor bounce took shape during the latter part of last week.

Looking ahead to next week the euro is set up for further losses as the path of least resistance has turned lower. Looking to a capper on any further strength there is resistance in the 11825-11880 area (old support becomes new resistance). As long as the euro stays below this area a downward bias will remain firmly intact.

Looking lower towards support eyes will be on the August low at 11662 and the 2016 high of 11616, of which the latter just happens to align almost precisely with the measured move target of the ‘head-and-shoulders’ pattern (determined by subtracting the height of the pattern from the neckline).

Bottom line: Shorts look set to have the upperhand as a fresh month gets underway as long as the euro remains capped by resistance. On weakness, we’ll be watching how the euro responds to a drop into support levels.

For a longer-term outlook on EURUSD, check out the just released Q4 Forecast.

EURUSD: Daily

EURUSD Weekly Technical Analysis: New Month, More Weakness

—Written by Paul Robinson, Market Analyst

You can receive Paul’s analysis directly via email bysigning up here.

You can follow Paul on Twitter at@PaulRobinonFX.

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Analys från DailyFX

Euro Bias Mixed Heading into October, Q4’17

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Euro Bias Mixed Heading into October, Q4'17

Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.

EURUSD: Retail trader data shows 37.3% of traders are net-long with the ratio of traders short to long at 1.68 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.07831; price has moved 9.6% higher since then. The number of traders net-long is 15.4% lower than yesterday and 16.4% higher from last week, while the number of traders net-short is 0.4% higher than yesterday and 10.5% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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British Pound Reversal Potential Persists Heading into New Quarter

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British Pound Reversal Potential Persists Heading into New Quarter

Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.

GBPUSD: Retail trader data shows 38.2% of traders are net-long with the ratio of traders short to long at 1.62 to 1. In fact, traders have remained net-short since Sep 05 when GBPUSD traded near 1.29615; price has moved 3.4% higher since then. The number of traders net-long is 0.1% higher than yesterday and 13.4% higher from last week, while the number of traders net-short is 10.6% lower than yesterday and 18.3% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse lower despite the fact traders remain net-short.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, please fill out this form

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