Recent BoJ minutes for June revealed a decreased concern over inflation among some of the board members of the committee. Such sentiment will likely increase considering Japan’s underlying economy is unlike “some economies with vigorous demand and strong upward pressure on wages” as stated in the BoJ minutes. On the contrary, European inflation has increased to a record 4.0% leaving the ECB with no choice but to hold a hawkish bias. Furthermore, strengthening equity markets in both the US and Europe have increased risk appetite among traders, proliferating the Yen carry trade. With the ECB likely to raise rates along with increasing risk appetite among investors, yield gap widening will favor the Euro, continuing a EURJPY bull run.
With interest rate expectations firmly in favor of a bullish bias, the technical outlook opens the door for a short-term retracement downward. EURJPY price action has broken out of it’s longer-term bearish trend that began in July 2007 (Fig. 1). Since the March breakout the pair has been on a steady upward run (Fig. 2). The pair shows an Advance Block bearish formation with down candle confirmation (Fig. 2). The stochastic oscillator is above the significant 80 level on the 8 hours chart (Fig. 3), hinting the pair is overbought and lending credence to a forthcoming retracement.
Hedging Strategy
Currency Pair: EURJPY
Long Term Bias: Bullish
Long Term Position: Holding Long
Short Term Bias: Bearish
Short Term Position: Sell below 169.40, Target 166.84, Stop-Loss at 171.20
Traders looking to protect their existing long EURJPY position or enter short at a favorable price may consider a hedge short EURJPY below 169.40 with a target at 166.84. Once the profit target is hit, we expect the bullish trend to resume. We will maintain a stop-loss on our hedge position should EURJPY break out to the upside prior to the limit being hit. We will set the stop-loss near 171.20.
When should I use the hedging feature?
Markets hardly ever trade in the same direction for long. Though there are general trends that may unfold for weeks, months and years; there is almost always considerable fluctuation in price during these periods – sometimes leading to significant retracements. There are a few common strategies that traders use to immunize their risk to counter-trend moves while still holding to the long-term trend. One method of reacting to these changing tides is to actively enter and exit a trade on each swing, which requires constant attention and a superior ability to pick tops and bottoms. The other, more passive, strategy is to hold on for the long-term trend through retracements in the belief that the higher trend will reengage. Taking a temporary hedge positions through the counter-trend moves, on the other hand, requires less accuracy in picking tops and bottoms and at the same time lowers the drawdown while increasing the potential for return.
The hedging feature is currently available on all accounts using FXCM’s No Dealing Desk service.
For more information on FXCM hedging strategies please visit http://www.fxcm.com/hedging.jsp.
To reach Ilya and Luis with comments regarding this or other articles they have authored, please email them at [email protected].
