Big news of the day was China devaluing its currency, bringing on a round of risk aversion. For me, AUD/JPY is a great way to play this potential sentiment change.
During the Tuesday forex trading session, it looks like risk aversion behavior was the main driver for price action thanks to the aforementioned news about China’s move to lower the value of its currency. As usual, the comdolls took a big hit on the news, including the Australian dollar, which is closely tied to China events because of the strong trade relationship between Australia and China.
With both risk aversion and China weakness in play, I thought AUD/JPY would be the perfect pair to play this fresh develop in the global markets as risk aversion sentiment tends to benefit the Japanese yen. And as mentioned before, the Aussie tends to move in positive correlation with Chinese news, which was demonstrated today by it’s broad weakness against the currency majors on the new catalyst.
In July, 92.00 was a strong resistance area that has already pulled in enough sellers, to push the pair down, so I’ll look to short there if retested to play the current drivers from China. I’ll have a small position and wide stop of more than one weekly ATR in case volatility continues to rise. My initial target will be the swing low, but I’ll use that as a point to re-assess and make adjustments rather than to take profit. Here’s what I’m doing:
Short quarter position AUD/JPY at 92.00, max stop at 95.50, initial target at 89.00
I’m only risking 0.25% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about .85:1, but I do plan on adding positions if the current themes hold. If so and there is a test/resistance around the 61% Fibonacci area (or a break of the previous swing low), I’ll look to add then. Of course, anything can happen in the forex markets, so if the story changes I’ll be sure to reassess and adjust quickly if necessary. Stay tuned!