The Blue Line to Red Line differential on the 15 minute or 30-minute time frame charts is often gap filled over a trading horizon of a day or two.
When things become overbought or oversold, there is a tendency for mean reversion.
With respect to the Japanese yen, it has been on a downward trend against the US dollar throughout much of this year, losing more than a fifth of its value to hit the lowest level since 1990. This is a significant development that will have limits.
6J Technical Analysis | Causal Capital, Martin Davies
TRADE CATALYST
The move is so extreme that there is a possibility that the Bank of Japan will intervene to prevent further depreciation of its currency. The trading opportunity here is a multiday reversion from hard moves to the downside being gap filled and that trade idea played out nicely on Friday.
TECHNICAL TRADING PLAN
We wait for a positive engagement from the market; the mounting of the 50 ma gave us the indication that testing entry with a long position would be relatively safe (risk-managed defined trading practices are essential execution approaches with futures markets). We also had a Buy Signal Fire on our algo system, and the currency had behaving nicely in its consolidation zone.
You will often have a second chance to capture these types of opportunities, and the 50 ma support buy-up candle provided that signal before the reversion journey to the Yen's final multiday resting point really got going.
You should look to close this bounce trade once the multiday narrative is met or in the chart shown above; when the yen futures travel through the purple line, make sure to move your stops up towards the fair price zone.
You could engage with the opportunity using the 6JZ3 CME Futures Contract, and there are many reasons for using futures to get involved here; starting off with clean volume profile information is provided from the exchange and that really helps with our trade analysis.
WHY HAS THE YEN COLLAPSED
The yen’s slide has been driven by the difference between interest rates in Japan and the US. Since March, the US Federal Reserve has been aggressively raising interest rates to quell inflation. We have moved from an interest regime that was effective zero or to be precise 0.25% to 3.25%, that's quite extraordinary and it's having a lot of impacts on different asset classes around the world.
Higher interest rates tend to make a currency more attractive because of the carry trade differential between high and low currency rate jurisdications. Investors borrow in cheap interest zones and invest in expensive ones. The result of this global market dynamic is that there is less demand for currencies from countries with lower rates, and Japan has kept rates extraordinarily low with the BOJ Governor Haruhiko Kuroda stating that the Japanese economy is too weak to handle higher interest rates.
Will this trade opportunity continue happening? You wish upon a star but when it comes to markets, be patient and wait for the yen to make its next move.
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