|
Don't Stop Believin'
It's been a while since we visited our old friend the Japanese Yen. I say friend because this currency has been very good to trend traders this year. After many months of trending, the infamous 'carry trade' currency took a breather, and many of the JPY pairs consolidated into ascending triangles and sideways patterns. Now that appears to have ended, at least as far as the Euro is concerned. After six weeks of bouncing back and forth between support and resistance, the Euro-Japanese Yen (EUR/JPY) currency pair broke out with a vengeance on June 15. The former resistance level of around 164.00 -164.50 now looks like a potential entry point for a pullback on the daily chart. While long traders simply bought at support and waited for the trend to resume, I'm sure many of the shorts "never heard it coming" (see figure 1).
Figure 1: EUR/JPY blasts out of a consolidation, and the trend resumes. Source: FXTrek
To get an idea of just how long this has been going on, please have a look at the weekly chart. Traders who have been shorting EUR/JPY for the past two years have had about as much of a chance as Tony Soprano eating onion rings in a diner. Note that the recent consolidation seems less significant on the weekly chart (see figure 2).
Figure 2: Weekly chart shows EUR/JPY uptrend has lasted for years. Source: FXTrek
Still, someone asked me earlier today when I thought this pair would turn around. The question presupposes that EUR/JPY must turn around at some point, but this is not necessarily the case. Why should it turn around? Has it gone too far? It seems to me that the gains have been consolidated, and the trend is still intact. If you believe that the trend has no more room to run, just take a look at a very long-term, monthly chart. In short, "don't stop believing" that this pair can go higher before the trend fades to black (see figure 3).
Figure 3: EUR/JPY is a long way from its 1980's highs. Source: FXTrek
Intervention
The Reserve Bank of New Zealand (RBNZ), concerned about the strength of that country's currency, has intervened for a second time this month. The central bank is rumored to have stepped in to the market to sell its own currency, the New Zealand Dollar, and buy Japanese Yen in an effort to stem the runaway trend in the NZD/JPY currency pair. Last week's June 11 intervention had a sudden but temporary effect on the pair, as indicated by the long red candle (see figure 4).
Figure 4: Long red candle shows the effect of intervention on NZD/JPY. Source: FXTrek
New Zealand's central bank is concerned that the Kiwi (nickname for the New Zealand Dollar) is so strong that it will have a negative impact on exports and ultimately, growth. The RBNZ seems to be fighting an uphill battle, as the differential in interest rates (New Zealand 8.00%, vs. Japan 0.50%) makes New Zealand an attractive destination for investment capital when compared to Japan. This flow of capital has the effect of strengthening the Kiwi and weakening the Yen. The interest rate differential between the two countries is likely to grow wider, which will only exacerbate the situation. Longs beware – yes, we are in an uptrend but you can expect further interventions as the RBNZ tries to cool the red-hot Kiwi.
Intervention, Part II
The U.S. stance on currency intervention has been to let the market decide which exchange rates are appropriate, which really is the only sensible way to go. Free markets should include Forex, and the U.S. has maintained a long-standing policy of avoiding interference in the currency markets. This could be about to change, as Senate legislation has been introduced that would require the U.S. Treasury to intervene in global markets if currencies become fundamentally "misaligned". Clearly this is aimed squarely at China, and the reluctance of the People's Bank of China to allow the Yuan to strengthen in any substantial way.
While I'm sure that the senators behind this bill are simply playing to voter sympathies, I'd like to point out a simple fact – nobody is going to win an economic war between the U.S. and China. China can wreck the U.S. dollar any time it wishes, simply by refusing to purchase U.S. Treasuries. This would be a no-win for China, since it holds well over $1 Trillion in U.S. assets, but it is an option. The U.S. could intervene to make the Yuan stronger or levy tariffs on imports, but this would in turn create inflation by driving up the price of goods imported from China. It could also create a tit-for-tat cycle of intervention that would ultimately accomplish nothing. Remember, interventions can and often do fail.
Is China playing fair? No, they are not, but it is much easier to blame others than it is to look in the mirror. Here's a novel idea for Congress– instead of focusing on China, why not control spending? No, they'd rather play "let's get the bad guy" than "let's clean up our act." If China were to give in, would manufacturers return to the U.S. and reopen their long-shuttered factories? No, not as long as there are cheaper alternatives. As always, politicians are always prepared to tell us what we want to hear – regardless of whether or not it makes sense. There is no question that China is manipulating its currency and needs to do more to free up the Yuan, but this so-called solution will solve nothing – and at the same time it will send the wrong message about the U.S. philosophy of free and open markets.
Question of the Week
Q) I trade on the US stock exchanges, but I live in Europe. The bank currency accounts and ETFs are OK, but limited, and I am ready to move up. I would like to trade currencies on the Forex. Are there Forex sites that trade, price and provide charting 24 hours in the US?
Ed Ponsi) Thank you for your question. You'd be hard pressed to find a Forex broker or market maker in the U.S. (or elsewhere) that doesn't provide round the clock trading and charting services – these services are considered standard in the 24-hour Forex market. The key is to use a broker/ market maker that specializes in Forex trading. The only entities that do not provide this level of service are the old-school brokerage houses that specialize in bonds, mutual funds, and other traditional investments. They come from a culture of short workdays and early tee times, and they are not going to change to a 24-hour service model just to please Forex traders, who comprise a small fraction of their customer base. For better service, stick with brokers that specialize in Forex.
While the location of your broker is a concern, there are many Forex brokers located in various countries around the world. One advantage of using a U.S. based broker is regulation via the Commodities Futures Trading Commission (CFTC), whereas U.K. based brokers are regulated by an entity called the Financial Services Authority (FSA). There are notable Forex brokers located in Switzerland and Denmark. In the U.S., the CFTC prints monthly reports that reveal the amount of capital each FCM (Futures Commodities Merchant) is required to maintain, and the amount by which each FCM exceeds this level. This is valuable information to use when deciding where to place your money, whether you trade Forex, futures, or other instruments.
One huge advantage of trading Forex is that most of the brokers offer free platforms, free charting, free news feeds, and many other services for which stock traders normally must pay. Online Trading Academy is partnered with some excellent Forex brokers, who will not only give you outstanding service on your accounts, but in addition, they will actually reimburse 100% of your tuition when you take on-location Forex courses at Online Trading Academy. For Forex courses available, please click here. For our list of tuition reimbursement partners, please click here.
Have a question about Forex trading? Send an email to eponsi@tradingacademy.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading. |
|
Ed Ponsi is a globally recognized name as a lecturer and teacher and is the former Chief Trading Instructor for Forex Capital Markets. An experienced professional trader and money manager, Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. He is a regular contributor to TradingMarkets.com, SFO Magazine and FX Street, and is currently writing his first book for Wiley Finance.