Why & How USD Strength and JPY Weakness Provides Trade Setups with Massive Reward

The USDJPY has reached a very critical level on the chart. The 120.50 resistance top indicates a very important bounce or break spot and a key decision level. The USDJPY is not the only one to be in such a decision spot for this week: the EURUSD and GBPUSD also pose interesting trade setups (go here for more information).

This post discusses the trend, the technicals, the fundamentals and trade details of the setups.

TECHNICALS

The technicals are showing a strong USD uptrend for the past 3.5 years: month after month the USDJPY has mostly kept pushing to higher levels (purple arrows monthly). Also last month was yet another bullish candle even though price failed to break through the top or candle high. The next major resistance to be weary of is the monthly top at 124 (magenta line).

3- 3- 2015 uj month

The consolidation of the 2 inside monthly candles is better visible when analyzing the daily chart. It then becomes obvious that price action has formed a contracting wedge. Considering the explosive upside momentum (purple arrows daily) prior to the chart pattern formation, there is a high chance that the wedge will turn out to be a bullish wedge and not a bearish one.

Typically a wedge or triangle has 5 parts. These separate legs often become longer and expanded before the triangle breaks. At the moment the USDJPY is either in the last part of the triangle (dark blue arrow) OR it has already completed the chart pattern (light blue arrow). Both cases offer interesting setups and potential. But before any trades are considered, let us review the fundamental picture.

3- 3- 2015 usdjpy daily 1 

FUNDEMANTALS

Whereas the Bank of Japan (BOJ) increased its Quantitative Easing (QE) program in 2014, the Federal Reserve (FED) in fact has stopped with its QE “part 3” enlargement. The US is also showing stronger signals of economic recovery and the FED is seriously and actively discussing the potential of a rate hike as well.

Hence the fundamental picture is certainly in favor of more USD bullishness and more Yen bearishness. Here is a simple equation:

  • Reward: interest rate – US has slightly higher rates than Japan and a decent chance of rate hike later this year or in 2016;
  • Risk: GDP versus money supply /QE
    • The US GDP is growing but the QE is flat, which means more economic activity with the same amount of money is used in the economy – good for currency demand.
    • The Japanese GDP and economic figures are not growing as much as the US plus the QE is growing, which means same economic activity with more money being used in the economy – bad for currency demand.

When considering the reward to risk balance on both currencies then it is obvious that the USD should be the winner in the long-term. The demand for the USD is expected to be higher than the demand for the JPY, plus the compensation (interest rate) for the USD is slightly higher and also expected to become higher than the JPY. More reward for the USD with less risk.

TRADE DETAILS

With a bullish triangle in play, price is expected to bounce and then break (green arrows) above the resistance of the triangle (red). There are 2 main trade setups:

  1. Bounce at a lower part of the wedge (blue circle). In this case price retraces back to the bottom of the wedge. An entry around 116-117 (depending on price action) with a stop loss below the triangle at 115.70 and a target at 124 offers a great reward to risk.
  2. Break at above the wedge (green circle). In this case price breaks above the resistance of the wedge. I must see a strong breakout candle before trading this setup. Depending on the daily candle, an entry could be around 120.50-121 (depending on price action) with a stop loss below the daily breakout candle low and a target at 124.

3- 3- 2015 usdjpy daily 2 

What do you think of the UJ and the 2 setups?

Happy Hunting!

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  • Chris

    Hello Razif, thank you! Much appreciated 🙂

  • razif

    very good explaination and i define it as professional ways of finding trades set up.