I wanted to follow up on a piece I wrote for Trader Planet on July 15th about the bullish case for EURJPY. It’s an appropriate time to look at this currency pair because I think it’s an appealing alternative to Euro/US Dollar (EURUSD).
MACRO DRIVERS
There’s a tug of war going on between the macro drivers of a brighter economic outlook in the European Monetary Union on the one hand (euro bullish) and an imminent reduction of quantitative easing by the Fed (dollar bullish) on the other amid firm growth prospects in the U.S. Why take your chances regarding which scenario will dominate psychology?
By contrast, Euro/Japanese Yen (EURJPY) is a cleaner trade because bullish fundamental underpinnings for the euro are coupled with a still bearish case for the yen, given the Bank of Japan’s uber loose monetary policy.
And best of all, the chart structure supports the macro picture. Since late May, a bull pennant has been forming right at Fibonacci resistance of 132.037, which is a 50% retracement of the primary downtrend from July 2008 to July 2012. A bull pennant is a tight triangle that characterizes a period in which profit taking is absorbed through a consolidation rather than a decline, indicative of strong demand. This is consistent with slowing momentum after RSI averages reached overbought conditions in the first quarter (sideways price action amid slowing momentum, in the context of a larger uptrend, is generally very bullish).
THE TRADE
You can position for a breakout from the pennant, placing a stop loss somewhere beneath the lower barrier. Upside potential is 140.988 – a 61.8% retracement of the 2008-2012 downtrend. My focus at miAnalysis is exchange traded products, and unfortunately there aren’t any that pace this currency pair. So this will only work for currency traders. I’ll be watching to see if ProShares UltraShort Yen (YCS), which aims to double the daily moves of US Dollar/Japanese Yen (USDJPY), sets up after a recent period of consolidation. The macro scenario for this trade also looks sound, given bullish fundamentals for the dollar against bearish drivers for the yen.
Happy trading, everyone!
