Short-term trading idea FX USDJPY – bear speculation: building on the idea from 14/08/17

Trading opportunities on the currency pair: On Friday the 8th of September, before exchanges closed for the weekend, the dollar fell below the C-C channel in a drop amounting to 61.8% of the upwards movement from 101.19 to 118.66. Cyclical analysis indicates that the dollar is set to fall further; to 105.96 by the 10th of October. There’s an intermediate support zone with a range of 106.60 – 108.85. The case for a drop will disappear if the dollar manages to quickly recover to 109.65 and break through the trend line.

Background

The previous idea on this currency pair came out on the 14th of August, 2017. At the time of press, the US dollar was trading at 109.17 JPY. In the idea, I considered a price rebound from the lower boundary of the C-C channel from 108.13 to 110.57. My expectations were met and the target was reached. The US dollar’s rise started from 108.27.

Current situation

Last week, the dollar shed 235 pips, or 2.16% against the yen. The yen’s rise was brought about by a general weakening of the dollar in addition to a retreat towards safe haven assets on the back of increased geopolitical tensions between the USA and North Korea.

Incessant provocations from North Korea have become a prevalent theme in global politics in recent weeks. On the 3rd of September, Pyongyang conducted its 6th nuclear test. Officials from other countries claim that they could create a nuclear warhead for a ballistic missile. Kim Jong-un is convinced that despite repeated threats from the US, they won’t decide to take any military action against North Korea.

On Friday the 8th of September, the Commodity Futures Trading Commission (CFTC) published its latest weekly report. The COT report (Commitments of Traders) shows a summary of traders’ open positions from 30/08/17 to 05/09/17.

Large speculators (Non-commercial): Last week, long positions increased by 5,256 to 45,986 contracts. Short positions increased by 9,304 to 122,311 contracts. Net short positions increased by 4,137 to 76,435 contracts.

Small speculators (Nonreportable positions): Long positions increased by 2,498 to 27,551 contracts. Short positions increased by 1,560 to 33,360 contracts. Net short positions have fallen by 942 to 5,805 contracts.

Hedgers (Commercial): This group of traders tends to open positions against large speculators. Last week, they reduced their long positions by 55 to 153,614 contracts. Short positions were reduced by 3,164 to 71,460 contracts. Open interest increased by 8,441 to 257,898 contracts.

The latest COT report doesn’t include the last three trading days. The dollar has lost another 140 pips since Tuesday, falling to 107.32. As the yen was strengthening, large speculators opened more short positions than long ones, while small speculators opened more long positions than short ones. It’s clear from the report that traders are confused and don’t know whether to buy or sell the yen.

Short-term trading idea FX USDJPY – bear speculation: building on the idea from 14/08/17

Fig 1. Daily chart. Source: TradingView

Before the weekend on Friday, the US dollar fell below the C-C channel, falling 61.8% of the upwards movement from 101.19 to 118.66. Investors were fearful that North Korea might launch another ballistic missile on the 9th of September, the anniversary of the country’s founding. The weekend went by peacefully, however, so we could see a correction on the dollar today to 109.10. Cyclical analysis tells me that the US dollar will fall to 105.96 by 10/10/17. There’s an intermediate support zone ranging from 106.60 to 106.85. A quick price recovery to 109.65 and a breakout of the trend line would nullify the case for a fall.

Source: Alpari

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