Trading the USD/JPY Post-Election

12/19/2012 9:00 am EST

Focus: FOREX

Jeremy Wagner

Head of Daily FX Education, FXCM

USD/JPYhas tested key resistance at 84.17, and if this resistance holds, the USD/JPY may be in the final stages of a 91-week triangle pattern, writes Jeremy Wagner of

The Japanese yen has arguably been the weakest currency since the Federal Reserve made the announcement of additional rounds of quantitative easing back on September 13, 2012. With a new Prime Minister in town as a result of the Japanese elections last Sunday, the call is for more aggressive easing for Japan to fight its deflationary pressures.

This means an already weak Japanese yen may get weaker. A sustained break above 84.17 could be a trend defining moment for the USD/JPY as subsequent higher highs and higher lows would be in place.

NZD/JPY Relative Strength

(Created using FXCM’s Marketscope 2.0 charts)
Click to Enlarge

If we do see a sustained break above 84.17, consider selling the weak JPY against a currency other than the US dollar. For example, buy a relatively strong NZD…or essentially buy the NZD/JPY currency pair.

Of the Japanese cross pairs, the New Zealand dollar is the only one, which has traded above the April 2011 high. This was a swing high in the USD/JPY pair, which was a result of coordinated central bank intervention in response to the Fukushima nuclear disaster. Therefore, NZD/JPY has been showing relative strength against the other JPY crosses, and as forex traders, we should look to buy strong currencies and sell weak currencies.

Therefore, if you believe the USD/JPY will continue to strengthen over the long run, use this pull back to consider buying the NZD/JPY near 69.60, which was the October 2009 high, which may act like support for the pair.

USD/JPY Bearish Scenario
However, if you examine a longer-term chart, you’ll notice the USD/JPY is at key resistance defined by the March 2012 high. So long as this resistance level holds, the pair may be carving out a bearish triangle that has been in place since March 2011.

The USD/JPY Bearish Triangle Set-Up

(Created using FXCM’s Marketscope 2.0 charts)
Click to Enlarge

The USD/JPY has been consolidating sideways since the devastating 2011 earthquake and subsequent tsunami. Since March 2011, the total range of the triangle has been about 1,000 pips from 75.56 to 85.51.

Monday’s gap higher severely strains this bearish pattern. However, important turns can take place during emotional news releases. With Shinzo Abe taking over the controls at the Prime Minister slot, most market watchers are expecting a strong push be made towards the Bank of Japan for more stimulus, which may weaken the JPY causing the crosses to continue higher.

Therefore, a strong emotional response to the elections could become the back drop for the Japanese yen to strengthen. Use the high of 84.40 as the risk level for any short trades taken on USD/JPY.

If the bearish triangle pattern does play out, there is a reasonable chance of new lows seen in the coming months below the low of 75.56 (green line).

Therefore, that makes trading the triangle fairly straightforward. The stop loss is placed just above Monday’s high near 84.50 and target 75.60. If one entered near Monday’s market price of 84.00, this makes for a very strong risk-to-reward ratio.

By Jeremy Wagner, Head Trading Instructor, DailyFX Education

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