Since the GFC that started around 2008 and arguably since the tech bubble burst in 2000, central banks have worked with lower inflationary pressures and have attempted to devalue their currencies to make exports more attractive. Before the trade wars, we had currency wars, and a few countries got their rates below zero. The yields in the chart above are the Japanese (red) and German (black) yields and it shows how the recent ECB talk of raising rates in the coming months has had a positive reaction on the germen yield and interest rates. The BoJ is still announcing unlimited buying of JGBs at a fixed rate to support their aging economy, whereas the Europeans are closing in on a monetary tightening cycle.
In today’s London session the euro is currently battling it out with the Chinese yuan and Aussie for the strongest currency relative to the others. The yen and Swiss franc are showing relative weakness with the greenback closely following behind. Those flows show a more positive risk-on scenario to trade, and we should expect to see the equities and commodities bid today.
The AUDJPY made a bullish reversal on the daily chart on the 17th of May 2022 but then proceeded to trade sideways within a tight range until we had more positive flows on Friday. For full disclosure, I have been long the AUDJPY for several days and I am expecting the price action to keep traveling higher into the RBA rare decision next week. The AUDJPY is a good leading indicator for which way the indices will flow, and since the high-volume bounce on the 20th of May, I have been anticipating the S&P500 to move off its lows to test the daily 200 EMA at least.
This morning’s sentiment indicator for the EURJPY shows 72% of traders on the ActivTrader platform are bearish EURJPY, which is a great indicator for contrarians to look to trade the opposite way and try and take the short-positioned traders’ stops. As the bearish sentiment increases so will the short squeeze in my opinion. The closer we get to the ECB raising rates, the faster the rise in the EURJPY should be.
Much like the daily AUDJPY the EURJPY also signalled a bullish reversal several days ago and it appears that we are now breaking higher and out of the consolidation range. A positive close today and the highs from the 21st of April will be the initial profit target and then around 144.00 would be the final target for a risk-reward ratio of 1:2 from present levels.
Using the same strategy but on an m30 chart, traders who got long in line with the higher time frame signal but on an intraday chart, maybe getting ready to close out their initial long trade if they are following a RRR of 1:2. Others who use a breakout like the London Breakout Strategy may be looking for a measured move a bit higher.
Currently, on the higher and intraday timeframes, the EURJPY is showing bullish price action and momentum and on a quiet news day, we’re just hoping that no headline news risk stops us out during the US session, as the spreads will probably rise due to the US markets being very low volume today as they observe the Memorial Day bank holiday.