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Trader thoughts - no country for old JPY

Chris Weston
Head of Research
25 Mar 2022
The flow that stands out is the JPY and clients are now holding a solid net long exposure here.

A simple visual of the daily chart of any of the commodity currencies vs JPY is just too compelling and the counter-trend traders are stepping in to fade this move. I won’t critique that judgement, but I for one struggle to initiate longs here - at one stage before the rollover we saw price 3 standard deviations from its 5-day EMA and the third-highest read vs its 5-year average.

It really has been a lesson in holding and I hear so many saying “traders take care of losing trades, winners take care of themselves”. I disagree with this statement because it's these sorts of moves that if you’re short JPY that holding and not taking profits is just so hard and you end up trading your P&L – you see a decent profit and one’s emotions force an exit to crystallise and to lock in profits – just so you can’t be wrong.

Remember pro traders go broke taking small profits, retail go broke taking big losses. Obviously, this is down to strategy, but for swing and position traders, especially those who trade momentum and trends, these are the outlier moves that need to be held – a rules-based approach helps you stay in the trade and if we take AUDJPY for example, just using a simple moving average crossover stop would keep you in the trade – an example here is 3 EMA vs 9 EMA, which has yet to cross and yet to offer an exit signal, for long positions.

AUDJPY daily chart


(Source: TradingView - Past performance is not indicative of future performance.)

These types of one-sided, extended-duration moves are rare, but one simple momentum strategy is to buy the breakout – price hugs the upper Bollinger Band, which subsequently widen, with price finding support into the 5-day EMA. The exit is the 3-EMA crossing below the 9EMA.

While we can use this as a simple exit strategy in a momentum trade, some may add an additional rule of extremity - If I look at the difference between these two averages it currently sits at 2.02 which is about as extreme as you will ever see – is this indicator suggestive that the move has gone too far? Perhaps, but it's like standing in front of a freight train right now.

What we’re seeing is extreme central bank divergence – granted the RBA are yet to really open the flood gates on hikes but commodities are strong, and the markets have discounted a hiking cycle in Australia, with 142bp of hikes priced this year. BoJ gov Kuroda is openly welcoming the JPY weakness and when crude is this elevated it's worth remembering that Japan is a big oil importer – this move hurts – we can look at AUS-Japan 3- and 6-month forward rates or bond yield differentials and see the carry (income) being long AUD holds for funds is compelling.

ETHUSD daily chart


(Source: TradingView - Past performance is not indicative of future performance.)

Take a look at the daily of Ethereum – with price closing above the March swing high, perhaps we can see a similar move? We never know, but the trick is to take the loss early and ride the momentum move until the market has had enough.

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