We had the best possible outcome for FOMC's Rate decision and Fed Yellens speech which was neutral IMO as expected, with the Economic Projections being dovish, downgrading the projected rate hike cycle. We now look to BOJ.
Trading strategy:
LONG USDJPY(possibly short also GBPJPY for longer term investors or investors that want to hedge against a hawkish BOJ)
TP @>107 = 100pips at least - SL @104.9-105.2
Reasoning
- FOMC overall was neutral, we had lower projections but Yellen remained mildly upbeat, telling the market to shrug off the short NFP report (quite rightly).
- So this means $ demand/ supply remains flat.
- The main driver of the LONG UJ play is on the JPY side. Given that FOMC was flat, this means JPY "risk-off" and uncertainty buying which would have arisen if the fed was aggressively hawkish/ hiked was neutralised - meaning JPY "rate hike induced" safe haven demand was neutralised as instead the FOMC helped risk trade higher = LONG USDJPY as JPY demand falls - So now we have a situation of neutral USD and neutral JPY as there was no rate hike to unsteady markets and cause JPY to be brought
- So the driver of the LONG USDJPY is the fact that IMO the BOJ will be aggressively dovish and likely to cut rates - their core and CPI prints are consistantly below 0% at -0.5% for Tokyo CPI and Core, with National at -0.3% for both. These CPI prints are the average print for the last 6 months meaning BOJ policy has been inefective in reaching their goal as inflation is stale and not rising. Thus IMO they have to CUT and EASE and be DOVISH = Long USDJPY
- Further, Kuroda BOJ head said he is aware of JPY trading strongly due to its safe haven properties and he has stated he is prepared to fight this risk-off led Yen appreciation - this means HEAVY easing to negate the JPY risk-off strength and weaken the currency = long USDJPY
- Finally, a dovish BOJ helps ease the risk-off sentiment in the market at the moment (stocks falling and gold rallying) as BOJ easing puts more liquidity into the markets - calming the risk-off sentiment means LESS JPY buying and MORE JPY selling = LONG USDJPY
Evaluation
- So with USD as a stable denominator, I expect the BOJ to heavily ease in order to 1) improve their inflation performance closer to their target 2) to devalue JPY from the risk-off buying that brexit uncertainty has caused.
- Further, UJ is the best expression of the short JPY play as EUR and GBP are both comprimised by BREXIT uncertainty - which is constantly trying to trade eur and gbp lower - hence a long ej or gj is not advised - UJ is the least affected of the majors by brexit - *see my dynamic straddle post attached for more details*
- on that note one may argue AUD or NZD could be used for the long, since they too are even less affected by brexit downside, which is true, however i dont have enough experience in those markets - if think there is a better denominator than USD for the long then by all means use it - however IMO USD is the best of the bunch for future dollar demand as they are the only Central bank to be hiking NZD and AUD are still cutting.
- Also UJ imp volatility is finally falling with 1wk implieds dropping to 12.55 (-3.45), which improves the environment for buying. Plus as you can see below Historical Vol is also falling, once again illustrating that price may be ready to start rising again - low vol = more buying. Plus the ATR trades lower than average which is a bullish sign - bull markets range less.
- And we are still oversold massively at -2/3 SD of the mean of the weekly. Plus we trade close to the handle at 105.35 which is the strongest support level in USDJPY history thus helping upside from here (unless we break ofc).
Comments welcome
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If anyone needs anything explaining just ask :)
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Also good to note USD can be considered the 3rd most demanded "safe haven/ risk off" currency, behind JPY 1st and CHF 2nd.
Hence why I also believe USD should hold up well relatively to GBP and EUR and other crosses for a Long play and short JPY.
Looking good! You're right. The Jap econ is in the dump.
AhmetAlperOzen
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thank you, you make good fundamental analysis.
QuantumLogicTrading
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thanks, didnt go our way this time but thats what stops are for.. once global risk calms down and BOJ actually do something for their economy, we should see UJ back at 110. Long UJ will be a July-august trade i think.
mmmp12
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It's really funny, because BOJ still has negative rates, still is easing, and this doesn't help, almost like chf...
Kuroda said they will intervene at 105 - and I see there is no intervention ? Like chf and their '1.20 CHF/EUR ratio' blow off trick ?
QuantumLogicTrading
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I know my friend, I got burnt last night and had to hedge my positions 4% down.
Kuroda doesnt know what hes doing, the economy is a mess. However, this is the reason UJ is falling and WHY BOJ didnt do anything drastic at this meeting.
1. Kuroda wants to let this brexit/ uk eu referendum play out and see what happens - if he cut massively now, it could all get lost in the brexit uncertainty/ JPY safe haven buying - instead kuroda will wait and see then do a "drastic" cut in July/sept once these global risks have flattened
2. This UK EU Ref is a REAL big thing.. Implied vols are at levels like 2007 financial crash, so JPY for now is acting 1:1 like gold and is rally as investors flee to safety.
I Overlooked point 1., and on hindsight if i had realised it, i wouldnt have long UJ - kuroda waiting makes more sense, otherwise the ne wpolicy could get drowned out. Also point 2., I thought JPY could do with some selling, despite brexit uncertainty, since JPY has been rallying for weeks, i thought a dovish kuroda would give JPY a break maybe 100-200 pips for a day, but clearly not.
mmmp12
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Sound reasonable. I was long at silver and gold at their lows, but get stopped because of more lows coming... If havent got any SLs, I would be rich as hell now xd...
I must took of SL when going long with safe assets, I guess :p.
QuantumLogicTrading
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haha, yeah i use SL discretionary.. if i know the market is STRONG risk off or on, i dont put them on. Like now im running GCHF short with no SL