USD / JPY FORECAST - Rated "BUY"

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USD / JPY has been in a downtrend since July of 2008 when it was trading at about 110YEN to the Dollar JPY. Today (after an impressive 2 - 3 day rally from 90.00), it trades at around 92.65. The Japanese Yen has a fairly high correlation to risk and the Japanese Yen (Not the US dollar) appreciates the most in times of risk aversion (Note that yen appreciation means lower USD / JPY since JPY is the non-base pair).

Perceived resolution to the Greek problem, continued US and worldwide equity strength, and a spike in yields helped USD JPY break the downward trend line that had contained gains for a several months (See graph below). The break in the said trend line was further confirmed by the daily close and a full day candle above the dominant downward trend line. In our view, this signals a shift in trend and we believe the trend in this pair has turned up.

From a fundamental perspective, it makes sense to expect the Japanese Yen to weaken against the US dollar (higher USD / JPY) for the following reasons

• Interest rate expectations for the US dollar compared to the Yen have turned up. In other words, rate and speed of monetary tightening in the US is greater than that of the Japanese. The Japanese are still battling deflationary pressures and tightening for Japan in further down the road (and probably a lot slower) compared to the US. The deflationary battle Japan faces is evidenced by the 1.2% drop in consumer prices yesterday (ref Bloomberg article @ http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a.UD0fLMEhJk). Furthermore, as the Yen weakens, the Japanese (export modeled economy) can sustain its recovery.

• Also, we’ve said that the USD / JPY has a high correlation to risk and if you think global recovery is underway, then it is reasonable to expect USD JPY to rise . We think a rise to the 100 mark in the coming months is not out of the question.



From a technical stand point, the daily chart (1 year) clearly shows the break out that occurred earlier this week. The expectation is for USD JPY to retrace down and possibly touch (and bounce off) the broken resistance line before continuing the move upward. Right now, a retest of the old resistance should result in a pull back to the 91.25 area (the longer it takes USD JPY to retrace, the steeper the retracement since we are dealing with a downward sloping line).





Trade Plan:

Buy 3 Standard Lots of USD JPY following the price points below

Buy 2 lots of USD JPY @ 91.40

BUY 1 lot of USD JPY @ 91.00 (if it falls that far).

1 standard lot, 1 pip = $10.08

Using “last in, last out” technique.



Sell 2 lots @ 97.00 (560 pip potential)



Sell Final lot @ 99.00 (800 pip potential)



Risk Control:

Stops for the 1st 2 units should be placed at 89.90 (- 150 pip potential).

Stops of the last units should be placed at 89.00 (- 200 pip potential).

AUD / NZD SHORT TRADE ANALYSIS

Earlier today, the Royal Bank of New Zealand's rate decision came in with no surprises. The RBNZ held rates at 2.50% in line with analyst expectations; the kiwi sold off against the US dollar right after the release. A few hours later, the scheduled Australian jobs data came in lower than expected with Australia only adding 400 jobs as opposed to a forecast of 15,000. AUS/USD sold off initially from around 0.9150 down to 0.9120 but reclaimed pre data levels a few minutes later.




In the meantime, AUD/NZD has been trading in “all time” high territory for a few days now. The Pair is currently trading above 1.30 with multi year highs just below 1.32

Fundamentals:

Australia has been benefiting from steady Chinese demand for its commodities over the past 12 months and that has helped the economy rebound strongly. On the other hand, there are reports and signs that the Chinese will begin to tighten monetary policy to combat inflation and avert bubbles. Two days ago, Chinese authorities signaled that they may let the Yuan appreciate (one way to combat inflation is via currency appreciation). Lastly, Chinese CPI and PPI data just hit the wires less than an hour ago and Core Inflation came in at 2.7% versus the 2.5% forecast. A slowdown in Chinese expansion will have a significant effect on the Aussie economy. Eternal Market Analysis believes the Aussie dollar will slow its pace of appreciation and probably pull back  (at least in the near term) especially against its antipodean counterpart - the Kiwi.



Technicals:

The probability of a short trade is enhanced when initiated at resistance…remember the old saying..”sell at resistance”. As I mentioned earlier AUD NZD is currently trading within solid resistance zone / multiyear highs.

In December of 2005, AUD NZD bounced off 1.0480 (point 1 on chart below) and started an uptrend that temporarily topped out at 1.2440 in July of 2006. The correction of the 1.0480 to 1.2440 advance exceeded the 61.8% retracement down to 1.0938 (point 3) – July 2007. The next wave up began off the 1.0938 level and made a new high around 1.2950 (point 4) in July of 2008.

The next wave down in AUD NZD from the July 2008 high was aggressive and coincided with the onset of the recession. The decline retraced over 100% of the advance from 1.0938 and bottomed out just above 1.06 . The advance from 1.06 puts us at the new highs set at around 1.31 (point 5) just a few days ago. AUD trades just above 1.3050  against NZD and we believe a “multi pip” retracement in just around the corner.

Also, we expect this retracement like others with this pair over the past 5 years to exceed at the 61.8% advance from 1.06 (which equals 1.16.)



Trade Plan:



Short 2 Standard Lots of AUD NZD @ 1.3080 & Short 3 Standard Lots of AUD NZD @ 1.3120 if prices advance that high again prior to the decline.

This will put a fully triggered trade @ 5 lots short at an average price of 1.3100

AUD NZD $ Value / pip = $7.00 for each lot

Stop Loss or Risk for this trade is 300 pips = 1.3400



Profit Target is as follows:

Using Last in, last out:

Target 1: Take profits on 2 units sold at 1.3080 at 1.2480 (600pips)

Target 2: Take profits on another 2 units at 1.2200 (900 pips)

Target 3; Take profit on 1 unit at 1.1599 (1501 pips)

Total pip potential = 3001 pips

Move stop loss to break even once initial profit target its hit.

Trade Analysis: BUY USD CAD @ 1.0420

The Canadian dollar is one of the currencies with the highest correlation with commodities especially oil.


Oil prices are trading just around $80.00 a barrel (NYMEX Crude). Eternal Market Analysis believes that Oil is trading very close to its projected 1st quarter high ($85.00). The expectation is for oil to decline below $75.00 in the coming weeks.

Early this morning, USD CAD was trading slightly north of 1.0550, Canadian data came out at 830EST with GDP matching estimates at 0.4% m/m, IPPI m/m beating estimates at 0.6% vs. -0.1% forecast . USD CAD dipped 130 pips to 1.0420 on the better than expected Canadian data and higher oil prices.

Support for USD CAD is strong between 1.0380 - 1.0400, also we expect a pull back in commodity currencies as the Greek uncertainty and renewed economic and political uncertainty in the UK continues to weigh on risk. In addition, we believe oil has made its high for the week this morning at $80.62 per barrel (NYMEX) and the inverse USD CAD to Oil correlation should result in USD CAD advancing (Canadian dollar weakness) in the coming days



Trade is to go long USD CAD here at 1.0420 with a 400 pip profit target of 1.0820. Stops should be placed at 1.0260 for a 160 pip risk.



BUY 2 Standard Lots of USD CAD @ 1.0420

Trade Tenure – 1 to 2 weeks

$ Value / pip = $9.5 per lot (X 2)

400 pips = $3,800 (Profit Potential) per lot (X 2)

160 pips = $1,520 (Risk) per lot (X 2)