EUR/JPY has pulled back higher from its recent strong trend lower. Is it time for the sellers to take control once again?
In the one hour chart above, we can see that the market is currently testing a confluence of levels of interest: 61% Fibonacci retracement and a broken level of support-turned-resistance around 139.50. Not to say that it’s a guaranteed reversal point, but I’m sure a lot of EUR/JPY traders are watching it.
I think a driver for a move lower is the recent focus on risk sentiment. Emerging market fears pushed traders out of risk assets over the past few weeks, buying back the low yield assets used to fund them like the Japanese yen. Data has been weakening recently from both Japan (record weak current account) and Europe (weak industrial production numbers from France and Italy), so an argument can be made that we’ll see more risk-off flows in the short-term. The one risk to that idea though is that traders speculate the Bank of Japan (BOJ) recognizes this and prices in an increase to the BOJ’s easy monetary policy efforts–bearish for the yen.
At any rate, if the market breaks above 140.00, then I see that as my idea being invalidated so I get out, but if the market moves lower back to swing lows, then the risk-to-reward makes this a very attractive trade to me. Here’s what I am doing:
Short EUR/JPY half position 139.35, stop at 140.60, profit target at 136.35
I’m only risking 0.50% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 2.4:1. If the markets go my way, I’ll look to scale into a bigger position around 138.00 and trail my stop to increase my max reward, while limiting my risk. It’s up to the market from here on out…time to sit back, watch some Winter Olympics action and see where the markets take me.
Stay tuned and don’t forget to check out my short idea on GBP/AUD!