Closing AUD/JPY as the Story Changes

Forex Trade Review: 2014-05-20

The stories have changed for both the Yen and Aussie recently, so it’s time for me to shut my AUD/JPY trade down and review.

Before you move on, for those who are not familiar with my framework, signals, setups, or acronyms, please visit my discretionary trading framework blog.

Original Trade Idea: AUD/JPY Set to Move Higher?

AUD/JPY 4 Hour Chart

AUD/JPY 4 Hour Chart

In my last trade update, I mentioned that I would close down the trade if the risk-off momentum remain to the downside…and that’s what we got!  But it wasn’t necessarily risk aversion flows that pushed the market lower, it was the positive economic data we were starting to see from Japan in terms of GDP and inflation–some of the key metrics being watched by the Bank of Japan (BOJ).  Everyone’s been betting we’ll see more stimulus from the BOJ this year, but good economic data kills that idea if things are getting better.

And as a kicker for AUD/JPY bears, we got the meeting minutes from the most recent RBA meeting in which forex traders focused on the comments that growth would likely remain below trend, and that the current policy is likely to be appropriate for some time.  To traders, this means no rate hikes and it’s time to unwind rate hike bets.

My idea was that the Aussie would rally on the interest differential and an unwinding of Aussie shorts after coming off of the rate cut sentiment that pushed it down in 2013; I think the idea of no rate hikes is back in focus, putting pressure on the Aussie.  And for the Yen, I thought that the BOJ stimulus package would remain massive for some time.  That still might be the case as the positive data we’re seeing from Japan recently is pre-April Tax Hike data, but for now, I think the Yen will remain supported.  So, I decided to cut out manually at 94.16 as the market broke previous support areas for a small loss.

Total: -84 pips/ -0.28% loss

Overall, I thought my trade idea was good, but the Japanese economic data was a game changer for me to not hold on to this position for now.  I still like a long play on AUD/JPY, but it makes more sense to wait it out to see if we’ll get buying support once again.

This closure leaves me with only with one position open in EUR/USD, which is still positive at this time.  After almost two weeks of price action since Draghi’s statement, the ECB rate cut sentiment may be fully priced in by now and the market is having trouble staying below 1.3700.  I may have to cut this one short as well, but for now, I’ll continue to observe.  Stay tuned!