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Tuesday, February 28, 2017

DISSECTING USDJPY

“One of the very few ‘free’ markets remaining.”

Over the course of the last 10 years, since the start of the financial crisis in 2008, an amazing transformation has taken place in the financial trading world. From the early to mid 1990’s up to 2007 – 2008, Japan suffered through what was known as the “lost decades”; and while their interest rates have been low to near zero ever since then, USDJPY became the currency carry trade of the world and was sold to pile into Pounds, Aussie Dollars, Kiwi Dollars, and anything else that had a positive interest rate. For years, Mrs. Wantanabe smiled with glee as she sold and borrowed away Yen [that paid nothing] and raked in the cash from interest on much higher yielding currencies.

That all ended in 2008, as world interest rates crashed, and the Yen “carry trade” collapsed. Since then, though, and here is the ironic part, as all other markets have been taken over by the manipulators in some shape or form, USDJPY has morphed into an asset class unto itself, and when the Yen rallies strongly the “talking heads” refer to it as a “safe haven” trade. “Wait … what?” “A country with one of the world’s highest debt loads, no GDP growth for decades, an aging population, and a birth/death ratio well below 1.0, and this place is a safe haven for cash”? Don’t get me wrong, Japan is a great place, but a safe haven it ain’t.

What’s at play here, I think, is that Japan is safe from the manipulators; believe me, the FED, BOJ, SNB, IMF, and all the other alphabet soup central banks, along with their “Plunge Protection Teams” can keep stock prices through the various indices artificially high, can keep a lid on gold prices, can manipulate copper and other physical commodities, but cannot control USDJPY. And so, what we now see is a market that attracts all of the “hot” money the world has to offer, and along with corporate flow and capital flow from financial institutions worldwide, this is probably the last “anything close” to free market left in the world.

And this goes to the heart of what I mentioned yesterday, which is that USDJPY has the best spread, lowest commissions, and best liquidity [except when there isn’t any] of any market traded; gold, not so much by comparison. So while gold is stuck between a $3 HVALUE, what with the “bullion wall” standing strong above 1255, USDJPY today is almost … almost … back to normal trading conditions with an early NY range of about 80 PIPS. “So, how come gold doesn’t have an $8 range”? [Hint: See previous sentence about “bullion wall”.]

Today is a strange “event risk” day; leaks, more leaks, and outright rumor lies expected to be hitting the market as the day progresses, all with the express purpose of being “the definitive” outline of President Trump’s speech tonight to get you to do something you don’t want to do; namely, sell the breaks lower and buy the rally highs. Today especially, you have to be careful of the “other shoe to drop” syndrome I mentioned yesterday; cuz even if you are up in a position by being long near the bottom or short near the top, while that stop that looks “safe” one second it’s getting filled a millisecond later at a price you didn’t have any idea was in play. You planned on risking X, you got Y instead.

Just after the NY open in stocks, we got a “downdraft” in USDJPY [how many more like this?], and the low for the day candlestick [so far] put in a reversal and a bullish engulfing pattern, from which the market has put in a small rally. If I took this trade and got long I make a few PIPS; if I take this trade and the stops sub 112 get taken out, I potentially get filled 20 – 30 PIPS away from my stop either on or near the bottom. Given the fact the day should be “choppy” up/down as traders adjust positions before the speech tonight, how do I even come close to making this back if it happens? It would be a great place to liquidate and cover a short position obviously, but not a very good risk/reward proposition for getting long. And as morning turns into afternoon, I’m definitely looking for trading conditions to worsen; price more muted, followed by spikes, then rinse & repeat until tonight.

From a trading perspective, I am very hesitant to take a short position below 112.10 in today’s U.S. session; sure, there are stops below, but who is going to want to “bully” this stuff lower before tonight? And even if somebody puts the screws to USDJPY, what’s to say the stops get hit off and run like you want? Now what, when it starts to rally … where does it end on the up side in a market that’s seen the selling pressure go away?

Once today is over, and we can get into a more normal trading cycle, I will increase my volumes and attempt to “position scale” trading positions. My volumes have been very light [both in gold & USDJPY], due to the spike risk coming from the political spectrum; that will subside after tonight and the market will take its cue and go from there.

Earlier this morning I did one short trade off of a bearish engulfing pattern, and on the dive lower covered for profit. Overall, I was very pleased with my fills, especially my short liquidation buy which was filled a couple tenths of a PIP off of the low spike down; if I was in gold, there’s no way I get anywhere near this, so given equal market circumstances in terms of range and price moves, USDJPY is far superior.

As I write, USDJPY is slowly drifting lower, below 112; as I said, I don’t trust this move [yet]. At some point, shorts need to cover or else they risk going exposed into tonight’s speech at prices that could become a real problem. From the looks of the way this market is trading right now, it very much feels like the trade thinks Trump’s speech will be long rhetoric and short specifics, which is very much Dollar bearish, and if true, will more than likely see the 110 handle in USDJPY shortly. Having said that, though, never underestimate Trump from the surprise side of the equation; he lays out an aggressive agenda with some detail and see how fast USDJPY hits the 113 handle. So, there is a lot of risk in the market right now due to this uncertainty, and that makes me suspicious of being short from sub 112.10, cuz I don’t think the support area around 111.60 is going to be breached until at least during or after his speech. Which leaves shorts in the uncomfortable position of watching the clock tick down as dealers [at some point] start bidding the pair higher; cuz if USDJPY gets back over 112.25, it has the potential of being a repeat of the melt up we saw yesterday. “Who says lightening can’t hit twice in the same place 2 days in a row”?

And checking to see what USDJPY is doing while I write, here comes a 2 minute candlestick, 28 PIP landmine that blows short positions up; “gee, who coulda seen this coming”? And, again, this goes to the heart of my argument about “risk event” days; whether they are central bank interest rate decision days, election days, referendum days, NFP Friday’s, or something else, “event risk” skews decision making to the point of making trading on a par with sailing with Columbus to the New World in 1492; good luck with that.

For my part, I was very much cognizant of the risks today, and knew that the “early” trades [before New York stocks opened up and the Trump clock started ticking down to tonight] would be the least risky [in terms of spikes] and the ones I wanted to make. I really only had one good chance from the signals and maximized time in the trade versus profit gained to our advantage. Now we can leave this mess of politicized trading [hopefully] and get on with making money in earnest. I’ll be at the screen tonight, and it should be interesting to say the least to see what unfolds; if history is any guide, it won’t have much in the way of details that is going to unleash massive buying of Dollars, but with Trump one never knows what to expect.

PAMM/MAM spreadsheet directly below … I’m outta here … until tomorrow.
 

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Have a great day everybody!
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