I’m pretty sure I can’t get burned twice by the BOJ (famous last words, right?), so I’m looking at shorting EUR/JPY again ahead of a potentially volatile ECB monetary policy meeting.
It’s been a rocket ride higher for EUR/JPY thanks to the surprise easy money expansion by the Bank of Japan last week, and after a 500 pip move higher, the pair is nearly back to re-testing the 2014 highs last seen at the beginning of the year. I must be a glutton for punishment for giving this another go, but after a parabolic move and a very tempting potential reward-to-risk scenario, the setup looks too go to pass up if the previous resistance area between 143.00 to 145.00 does draw in sellers.
Now that we’re past the BOJ meeting–and it’s unlikely we’ll see another hike in quantitative easing anytime soon from them–the big event risk to this setup is the upcoming ECB meeting, which seems like there’s a new twist to what’s going on over at the European Central Bank. According to this story from Rueters, it seems like ECB President Mario Draghi isn’t getting along nicely with fellow governing board members. Long story short, Draghi is a pretty dovish guy with sights on doing a broad quantitative easing program like the FOMC did in the U.S., but the other governing members are not sure it would be great thing for Europe given the diversity of its economies. This means we may not see QE from the ECB just yet…but who knows, right?
Of course no one knows, but here’s how I’m framing my thoughts:
- Despite recent positive data, the euro zone is still weak, so there’s a very low probability of the ECB tightening monetary policy.
- If they continue to keep policy as-is, it will continue to be difficult to fight the drop in inflation.
- If there is going to be no easy money expansion in Europe, how will the economy be supported without? What are the other solutions on the table, or better than cheap or free money? I don’t think there are any at the moment.
- If there are issues between ECB board members and other prominent European government figures, what’s the likelihood of anything positive getting done for Europe?
Overall, the situation in Europe doesn’t look that great to me, and after a near straight shot higher, I’m looking to play euro weakness against the yen on the potential for a snap back. I’ll be a little bit more cautious with my entry this time around, with initial orders near the very top of this year’s range, with a relatively tight stop and big max profit target in case the euro goes loco to the downside. Here’s what I’m doing:
Short full position EUR/JPY at 145.00, stop at 147.00, max profit target at 137.00
Who knows what is going to happen with the ECB this week, but with this trade structure, my potential return-on-risk is about 4:1. And if the ECB plays all nice and decides to hold off on QE with consensus, that would almost certainly push EUR/JPY higher to take me out. But a 1% loss is a small scratch to my account, and it is a risk worth taking to me for a potential 4x return, more if I scale into a winning position. With my orders now in, it’s time to sit back, wait and see. Stay tuned!