Incredible Volatility On Lehman, AIG Scares Make For Interesting Yen Cross Setups

One word can describe the state of the currency market over the past week: volatile. What's more, no area of the FX market has been as active (or aimless) as the yen crosses. With risk appetite hammered and the global policy makers trying to extinguish the fires, we have been left with many short-term and long-term setups in the carry favorite yen pairs. Look at our analyts' setups below to see what they think about the market:

Chief Strategist - Antonio Sousa

My picks: Sell EUR/JPY
Expertise: Fundamentals, Volatility and Sentiment.
Average Time Frame of Trades: 1 day to 3 months

The currency market has been very volatile and a solid wave of risk aversion is likely to continue helping lower yielding currencies like the Japanese yen. Indeed, I remain short EUR/JPY and I expect the euro to fall further against the yen on speculation the BoJ will keep rates on hold while the ECB will have to cut rates to prevent the euro area from falling into a much deeper recession. Lower interest rate differentials could make the euro less attractive to carry traders and the lower level of demand for bonds and stocks denominated in euros could accelerate the losses in the EUR/JPY.

Currency Strategist - John Kicklighter

My picks: Pending CHFJPY
Expertise: Combining Money Management with Fundamental and Technical Analysis
Average Time Frame of Trades: 3 days - 1 week

Since volatility in the carry trade was stoked by the blowup of Lehman Brothers and the possible collapse (to fortunate bailout of AIG), technical levels in the yen crosses, and indeed all carry related pairs, have been bent and broken. Looking across the yen spectrum today there are few pairs that have realistic levels of risk/reward and reliable technicals to cue a decent trade. Therefore, it will fall to the long-term evolution of technicals and fundamentals to find a good cross. Trying to ignored the market's recent 'noise,' one of the few setups that doesn't take on excessive levels of risk is a short CHFJPY positoin. Theoretically each component is a funding currency in the carry trade (though the yen is still far more correlated to the risk trends and it shows), so we hedge that consideration somewhat. Fundamentally, the outlook for both economies is concerning, but the Swiss has so far seemed immune the projected recession in the Euro Zone - speculation that is not likely to last. What's more, there is little chance that Japan would even consider lowering its rates, but the SNB certainly has room to do so.

Technically, CHFJPY is in downtrend since the July swing high and in the fray, major trendlines (starting from the November 2001 low) and fib levels (a 50% retracement of the June 2005 to July 2008 swing high). If exogenous event risk settles, the dominant trend would still be in place. Even if it doesn't, the lighter carry correlation may not override the strong technicals. For a position, this pair can be played on a long-term and short-term basis. Long-term, a daily close below 93 would be the cautious approach and targets could be wide (though stops will need to be equally wide). Short-term a cautious approach would be to take advantage of the recent range and look for entry near or above 95 to a portion of the 200/250-point range (though stops can be tighter here). Trading the yen is dangerous in these market conditions and should only be down if you are willing to accept the high risk and actively control position size to reduce risk.

Currency Strategist - Terri Belkas

My picks: Long EUR/USD
Expertise: Fundamentals Combined With Technicals
Average Time Frame of Trades: 1 - 3 Days

The focus today is on the JPY crosses, but I'm going to stick with my pick of long EUR/USD to target 1.4450. We've seen the pair test the 61.8% fib of 1.3880 - 1.4451 at 1.4100 and intraday trendline support (former resistance) at 1.4125. While trading the US dollar right now is extremely risky, the fact that the government's AIG intervention has done little to soothe risk aversion or boost confidence in the US economy leaves me bearish on the greenback. Also, fed fund futures are pricing in 25bps worth of rate cuts by the Federal Reserve at their next meeting in October. I don't think they'll actually make such a move, but that sentiment alone is enough to benefit EUR/USD long positions.

Currency Analyst - David Rodriguez

My picks: Continue selling USD/JPY rallies
Expertise: System Trading
Average Time Frame of Trades: 2-10 weeks

Exactly one week ago I signaled my preference for selling USD/JPY rallies, and I continue to maintain that ongoing market volatility will support the Japanese Yen through short-term forex trading. In terms of short-term targets, today's sharp intraday reversal tells me that we are likely to re-test the recent lows near the 103.50 mark. Intraday resistance near 106.30 should contain rallies through the near term. Look for other USD/JPY trading signals on our free forex trading signals page.

Currency Analyst - Ilya Spivak

My picks: Long CHFJPY above 94.09
Expertise: Macro Fundamentals, Classic Technical Analysis
Average Time Frame of Trades: 1 week - 6 months

Yen crosses have reasonably been pressured to the downside as investors flee from risky assets (carry trades included), spooked by the turmoil unfolding on Wall St. The Swiss Franc pairing has been no exception, but traders may see a bit of a different dynamic emerge for the pair in the coming days. From a relative strength perspective, recent fundamental data suggests the Japanese economy looks far weaker than that of Switzerland. Despite being tied to the sagging European Union for export demand, the Swiss economy appears somewhat supported by domestic demand for the time being. Indeed, Retail Sales nearly tripled expectations in July. Being a low yielder, the franc is also used as a funding currency for carry trades and so benefits from risk aversion-driven capital flows. CHFJPY has currently found support between the 161.8% and 176.4% Fibonacci extensions of the 05/08-07/03 rally (94.09 and 93.08, respectively). This also corresponds with the lower boundary of a steep downward sloping channel that has guided price action since late July. Look to go long just above 94.09, aiming for the channel top near the 96.00 level.

Currency Analyst - David Song

My picks: Short CHF/JPY
Expertise: Fundamentals Combined with Technicals
Average Time Frame of Trades: 2 Days - 2 Weeks

After dipping below 93.00 yesterday, the CHFJPY has bounced back to the upside, but has failed to break above 95.00. The pair has held within a tight range between 92.95 and 95.85 since last week, but may break out of its current range over the following weeks. The downward momentum should lead the pair lower over the next few days, and may test the 93.00 level for support on its way to the downside.

DailyFX

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