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USDJPY: a case study in FX trend following

12 May 2022 Written by Chris Weston  Pepperstone Head of Research Chris Weston

The tides in FX are turning and after a period where the JPY was smashed on a central bank divergence thematic, some are now seeing "value" and buying JPY, others covering JPY shorts. With implied vol high across asset classes and traders question the prospects of stagflation and recessionary risk, relative interest rate settings, and carry, are having less of an impact and we’re seeing the likes of the AUD, NZD and GBP revert back to being proxies of risk and following equity index futures. The USD still looks attractive vs the commodity currencies, especially with Chinese growth looking like it may well contract in Q2.

Technicals aside, and from a pure tactical standpoint, the USD looks less attractive vs the funding currencies – EUR, JPY, and CHF, although USDCHF is yet to give a signal to exit longs - so for now, I would stay with longs and a break of 0.9975 would be a clear positive for trending strategies.

Where we have seen an exit signal from trending longs is USDJPY. After the breakout of the consolidation range on 10 March, we saw price hug the upper BB, where all pullbacks were shallow and contained into the 38% fibo level – this sort of move happens very rarely and I know I talk about it with the benefit of hindsight, but this is where having a trend strategy can really aid the portfolio P&L.

USDJPY: a case study in FX trend following

The 5-day ROC naturally pushed continuously higher, which is obviously what you want to see in a momentum approach. The 3 and 8-day EMA was headed high and in alignment, and one can use this as a rules-based guide for exiting longs. We even saw a period of 13 continuous closes high, before consolidation and ultimately a move into 131.20.

USDJPY has been a trend followers dream and using a simple MA cross over – I’ve used the 3 EMA and 8 EMA - we see that it's only now that I’m getting an exit signal – this marries with the negative divergence and negative ROC. Time to move to the sidelines here it seems – GBPJPY shorts look interesting, and I will be watching to see if USDCHF can kick on.




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