Three charts and one trade idea: Short GBP/JPY?

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Thursday 12 December 2013

Quotable

“Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth.”

                                                                                             Marcus Aurelius

Commentary & Analysis

Three charts and one trade idea: Short GBP/JPY?

  1. It seems pretty clear the Japanese stock market and the Japanese yen are moving in unison, i.e. higher Japanese stocks and higher USD/JPY (yen weakens as stocks rally).  Below is an overlay of the Nikkei 225 Index and USD/JPY from early 2012 through today:

2. The British pound has staged a powerful rally against the US dollar since July, as the UK economy has surprised to the upside.  But maybe it is due for a rest considering a lot of the good news is probably in the price.  Below is a chart of the British pound futures, the bottom panel (green bars) includes open interest at the Chicago Mercantile Exchange.  It appears there is a pretty decent one way bet long the pound among punters (small specs) like us:

3. Clearly the British pound has soared against the US dollar; but it has been a complete blow-out against the Japanese yen.  The cross-rate GBP/JPY has increased a whopping 45.6% since the low back in September 2011; year-to-date 2013 it is up 20.6%.  That is a bunch for a major cross-rate pair to move.  

Now, if we simply apply a “keep it simple” three wave pulse approach, you can see that recent high is very close to the projection that could have been made much earlier in the year, i.e. Wave C = A targets at169.15.  The recent high is 170.04.  Not perfect, but not far from the projection.  The blow-out may continue, for sure.  But if risk aversion continues and the Nikkei starts to sell off as the Dow is now doing, maybe the yen strengthens and this trade clicks.  No guarantees.  And at the moment, the yen is continuing to weaken.  But short GBP/JPY sure looks interesting from a risk/reward perspective. 

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Black Swan Capital

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info@blackswantrading.com

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