USD/JPY is breaking a major support area that if it holds, has awesome reward-to-risk potential…but will the bears come in to sustain the break?
Major Support Break on USD/JPY?
Fundamentally, we’ve got two economies in the U.S. and Japan on the upswing, enough so that monetary policy tightening is the theme of 2018 with the Federal Reserve (especially with potential tax reform on the way that may overheat the U.S. economy), and the Bank of Japan seeing enough strength to slightly reduce its purchasing program of buying long-dated Japanese government bonds back in January.
Normally, I wouldn’t pair up two strong economies or similar monetary policy paths for a trade, but I think they’re in different places in that the U.S. economy may be at a topping out point somewhere around the corner, while the Japanese economy still probably has more runway to improve and potentially increase the odds of monetary policy tightening in the next couple of years.
That’s the longer-term fundie outlook that I’m framing this idea on, and for the short-term, volatility and global risk aversion sentiment has picked up in the last week, giving the Japanese yen a major boost over the other major currencies in the last week. I don’t know how long this dynamic will last, but if it does, the potential momentum it brings to yen buyers is well worth the cost of holding the negative yielding currency, as seen with my quick gain on my recently closed AUD/JPY trade. So, I’ll continue to play a long yen bias for now until the markets calm down and stabilize back to its boring self…if it does.
From a price action stand point, the market is breaking below a significant area of support around 108.00 – 109.00, which was a big time buying opportunity in 2017. With this break, more sellers could be drawn in (if the recent pick up in volatility holds) and with the next major support area coming in around 101.00, the potential max reward is certainly worth looking at to me.
With a week full of economic data from both the U.S. and Japan, I’m going to go a little bit conservative with my entry, hoping for a pullback higher to get in at a slightly better price. My stop will be the usual weekly ATR, and again, my max target will be that major support area for a really good potential return-on-risk. Here’s what I’m doing:
Short half position USD/JPY at 108.50, max stop loss at 110.25, max target at 101.00 for a near potential 5:1 return-on-risk
I’ll be risking only 0.5% of my account on this position and as usual, I’ll look to maximize the trade by adding to my position/roll stop up to max out the trade if the conditions continue to favor the Japanese yen and the trade hits around 1:1 ROR. Of course, I’ll look to close out quickly if conditions or data changes back in favor of the Greenback.
As always, remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t simply follow what I do.
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