Three Charts and One Trade Idea: Short GBP/JPY?

Quotable

“Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth.”

Marcus Aurelius

Commentary & Analysis

Three charts and one trade idea: Short GBP/JPY?

  1. It seems pretty clear the Japanese stock market and the Japanese yen are moving in unison, i.e. higher Japanese stocks and higher USD/JPY (yen weakens as stocks rally).  Below is an overlay of the Nikkei 225 Index and USD/JPY from early 2012 through today:

2. The British pound has staged a powerful rally against the US dollar since July, as the UK economy has surprised to the upside.  But maybe it is due for a rest considering a lot of the good news is probably in the price.  Below is a chart of the British pound futures, the bottom panel (green bars) includes open interest at the Chicago Mercantile Exchange.  It appears there is a pretty decent one way bet long the pound among punters (small specs) like us:

3. Clearly the British pound has soared against the US dollar; but it has been a complete blow-out against the Japanese yen.  The cross-rate GBP/JPY has increased a whopping 45.6% since the low back in September 2011; year-to-date 2013 it is up 20.6%.  That is a bunch for a major cross-rate pair to move.

Now, if we simply apply a “keep it simple” three wave pulse approach, you can see that recent high is very close to the projection that could have been made much earlier in the year, i.e. Wave C = A targets at169.15.  The recent high is 170.04.  Not perfect, but not far from the projection.  The blow-out may continue, for sure.  But if risk aversion continues and the Nikkei starts to sell off as the Dow is now doing, maybe the yen strengthens and this trade clicks.  No guarantees.  And at the moment, the yen is continuing to weaken.  But short GBP/JPY sure looks interesting from a risk/reward perspective.

  • Overall conditions do not favour long JPY position.
    The probability of USDJPY simply trailing the GBPJPY higher (due to inevitable taper) is much more likely, than say, even minor drop to 160 (if is to be shorted on daily chart).
    Plus, GBP itself has been very stubborn even against the EUR (which gained 1000 pips in the last 2 weeks vs. AUD) and will hardly give any ground against currency that expand substantially its monetary base.
    Two things to know about the BoJ:
    #1 – if Japanese economy does not perform extremely satisfactory, it means more QE might be needed.
    #2 – if Japanese economy does keep performing fragile-well, it means that QE works, it just needs some more.

    GBP/JPY is a back vocalist of USDJPY, and knowing what is coming from both sides of the Pacific, “If you board the wrong train, it is no use running along the corridor in the other direction.”
    ― Dietrich Bonhoeffer

  • Dollargreen

    Thanks for this post. Please I have joined this trading business and all is going well. I have the challenge of doing Technical analysis and charts interpretation. I followed my brokers Technical analysis and my account was blown out twice. How may you assist in this matter as I see future in this business

    Thank you

  • Short is advised, as on Thursday of this week in the United Kingdom, there was a reversal of the GBP/JPY currency carry trade.

    This resulted in derisking and deleveraging out of the UK, traded by the ETF, EWU, by 1.0%

    Popular stocks such as PUK, WPPGY, ARMH, DEO, RUK, and NN,
    as well as Bank LYG, traded lower .

    Of note, PUK, has very much been a debt trade, this is seen in its Long Term Debt to Equity Ratio of 1.0.

    DEO, has very much been a debt trade, as well, this is seen in its Long Term Debt to Equity Ratio of 1.1

    Now the currency carry trade and debt trade have been relegated to the dustbin of history.

    Liberalism’s three main drivers of economic life, creditism, corporatism and globalism, fail to support investment choice, evidencing the death of the Creature from Jekyll Island as well as the Milton Friedman Free To Choose Floating Currency Regime.

    The singular dynamo of regionalism drives authoritarianism; regional nannycrats having pooled sovereignty and commanding seigniorage, that is moneyness, evidences the rise of the beast regime of regional governance and totalitarian collectivism.

  • Booty

    I also think the yen weakness will continue, but the overall Picture the Yen Pairs shows some consolidation, but still slightly upward.

    But not as much Momentum as the weeks before.. So, i´m curious how this will work out…

  • the more you know, the more confused you become by definition.
    buy | sell the price on the chart when it completes your fundamental picture of the market,
    don’t buy | sell fundamental ideas only because it would look good on the charts.
    price is the manifestation of an agreement between the buyers and sellers, based on their projections for quality, weather, harvest, demand, import quotas, processing technologies, legislation and many many more known and unknown factors. Solely in its origin, is a lacking indicator…
    there is a lot more to it …

  • Thanks for the post. Right now I have a relatively large long position on GBP/JPY. Your opinion only assured me to stay in it even longer.