Yen crosspairs at crossroads

October 1, 2014 07:00 AM

Forex traders often focus on the immediate opportunities of intraday moves. Day trading, of course, provides the rewards of a daily dose of adrenalin along with the hopes of gaining a quick 20 pips. Sometimes, however, a longer duration perspective reveals opportunities that go beyond the intraday noise. 

Crosspairs are especially good candidates for detecting larger moves. They essentially pit expectations about one country’s economic prospects against another country’s economic prospects. Their respective currencies become vehicles that take on the emotions of those expectations when they strengthen or weaken against each other. Another benefit of trading crosspairs is the absence of the U.S. dollar as an immediate factor in the price action. U.S. dollar fundamentals have the capability of sucking all the oxygen out of the room and rendering legitimate fundamental factors of other currencies irrelevant. The absence of the dollar removes a great deal of volatility in the price patterns. 

Crosspairs offer what can be called a persistence of sentiment. Once a price pattern is underway, the continuity of that pattern can play out because economic expectations between two countries don’t involve sudden and large shifts. In this context, a look at the GBP/JPY and EUR/JPY crosspairs indicate some strong shifts in the global currents of expectation. Very big moves may be in the offing.

In considering trading these yen crosspairs, a look at the yen itself is a good first approach. The yen has followed weakening price pattern since “Abenomics” became the core underlying monetary policy of the Bank of Japan.  The goal of the BOJ is to prevent a return to deflation, which haunted Japan for more than a decade. Recent data showed that the core consumer price index rose at only a 1.3% annualized level.  

This lack of inflation actually enhances expectation for further BOJ interventions. If the yen is likely to weaken against other currencies, the potential for interesting profit opportunities arises. 

The EUR/JPY reflects the balance of fears of Eurozone deflation, against the expectations of Japanese reflation. Tipping the balance in favor of the euro weakening further and faster than the yen is the fact that Eurozone inflation fell to the lowest level since 2009 and reached the low of 0.4%.  In the face of fear of deflation the European Central Bank policy is clearly pushing for a weaker euro. Last June’s ECB action went to an extreme to encourage a weaker euro.  The ECB created negative interest rates on over-night deposits. The ECB charged 0.1 % on reserves. This sends a signal that a weaker euro is of paramount importance to the ECB. The Strategy of selling the EUR/JPY makes sense in this context (Yen at precipice vs. Eurozone).  
 

Let’s turn to the GBP/JPY pair.

The GBP/JPY opportunity is a ride on the British economic growth overheating. The downside opportunity is being driven by expectations that the Bank of England will be raising rates. The British GDP has recently surpassed its pre-crises growth levels. Usually such expectations strengthen the currency. In the case of the GBP, it has not worked because British inflation is still very low at 1.9%.  Usually central banks don’t tighten rates at these levels of inflation. As a result, a weaker pound is in the cards. 

The result for the forex trader is a potential recipe for a large move in either currency pair. Timing the trade, of course, is a critical factor of success. With these crosspairs, the best approach is using the rule of three: enter the trade in three legs. Each entry timed by a breakout of a new daily low.  The profit target can vary from a designated pip target or legging out.  Those trading the EUR/JPY and GBP/JPY should keep as a target the 50% monthly Fibonacci resistance level of 120 for the EUR/JPY, nearly 1700 pips away, and 142 for the GBP/JPY, nearly 3000 pips away.  Any stop should allow for a reasonable vibration of the price and could be as much as 100 pips. Low leverage is advised. 


Abe Cofnas is author of “Sentiment Indicators” and “Trading Binary Options: Strategies and Tactics” (Bloomberg Press). He is editor of binarydimensions.com newsletter and founder of Quicksilver Concepts Inc. (www.quicksilveralgos.com) an algorithm development company specializing in the gamification of trading. He can be reached at abecofnas@gmail.com.

About the Author

Abe Cofnas is author of “Sentiment Indicators” and “Trading Binary Options: Strategies and Tactics” (Bloomberg Press). He is editor of binarydimensions.com newsletter and can be reached at abecofnas@gmail.com.