From the desk of Tom Bruni @BruniCharting
Yen strength across many of its crosses has been a structural theme for the better half of the past year, but today a few of these pairs look to be setting up for some mean reversion over the short-term.
Pound / Yen remains in a downtrend below its downward sloping 200 day and made new lows in April, but momentum diverged positively. Today prices closed back above the February lows to confirm the bullish divergence and failed breakdown. This suggests we want to be long if prices remain above the February lows on a daily closing basis and add to our positions if prices close above the downtrend line from the February highs.
With prices currently 13% below their 200 day moving average, the potential for mean reversion offers a favorable risk/reward and the failed breakdown provides an entry where the risk is well-defined. Our upside price targets for this market are outlined in gray near prior support at 164 and the 2014 lows near 169-170.
We’re seeing similar action in Euro / Yen which briefly traded below the February lows and quickly reclaimed support to confirm the bullish momentum divergence and failed breakdown. This provides an entry on the long side where the risk is well-defined.
We can be buyers of this market as long as prices remain above February lows on a daily closing basis with a primary price objective at its accelerated downtrend line and former support near 127. If price action continues to improve at that point, this pair may see further upside toward toward the downtrend line from the August highs at 128-128.50.
The last pair where these particular conditions exist is Swiss Franc / Yen, except the February lows also correspond with the 2014 lows which adds to the significance of this support level. Prices briefly traded below the February and March lows, but quickly reclaimed them to confirm the bullish momentum divergence and failed breakdown.
As long as prices remain above the March lows of 111.89 on a daily closing basis, the bias remains to the upside. Our price targets for this pair are at former support and the downtrend line from the December highs near 116 and former support/resistance near 118.75.
The Bottom Line: All of these pairs remain in long-term downtrends, but tactically the risk/reward is skewed in favor of the bulls as long as they remain above their respective support levels. We’re seeing a number of major currencies appreciating relative to the Yen over the short-term, but these are the pairs where the risk is well-defined and the risk/reward is skewed heavily in our favor. For now these are counter-trend trades, but we’ll keep an eye on them as they develop to see if the resulting action has any important structural implications.
As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can. @BruniCharting
JC Here – I think this is a really interesting theme that Bruni is pointing out. The risk vs reward profiles in each of these yen crosses are very clear, which we love to see. But in addition to the forex price changes, I think the implications for risk appetite globally also come into question here. If we do indeed get mean reversions in these 3 crosses against the Japanese Yen: Pound, Euro and Swissy, that would suggest Yen prices are falling. This is generally a positive environment for stocks, particularly U.S. and Japanese equities. So even if you’re not an active forex trader, this is still a theme that I think is worth watching, even if it’s just from risk management perspective.
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Tags: $GBPJPY $EURJPY $CHFJPY $6J_F