Don't Forget the Yen amid the Brexit & Euro News

Don't Forget the Yen amid the Brexit & Euro News

Short-term traders don't need big trends to find opportunities. Right now, the USD/JPY, the Japanese Yen exchange rate, is at a Fibonacci retracement level with fundamentals that should ensure volatility—and opportunity—in the coming weeks. 

	 Prime Minister Shinzō Abe and President-elect Donald Trump shaking hands on November 17, 2016 |
Prime Minister Shinzō Abe and President-elect Donald Trump shaking hands on November 17, 2016 | Government of Japan (CC 4.0 International)

Last month's meeting between US President Donald Trump and Japanese Prime Minister Shinzo Abe got press coverage for various highlights, including the two crashing a wedding at Mar-a-Lago, reviewing sensitive documents relating to a North Korean missile launch in full view of waiters and guests, golfing, and sharing a meme-worthy 20-second handshake in the Oval Office. 

Amid all the colorful headlines and photos, the two also smoothed over some worries. During the campaign, Trump had criticized Japan for unfair trade practices and not paying enough for its defense. In contrast, during Abe's visit, the US president reaffirmed the "very, very deep" relationship between the countries and worked to cultivate a friendly working relationship. 

After the visit, Abe's approval rating went up slightly, to a healthy 62 percent. More importantly for investors, the yen's surge versus the dollar stopped for about a month, before resuming in mid-March with a sharp 3.5% increase in just one week. 

The dollar has been in a slide in recent weeks, following a surge after the US election. However, in March, another event further affected the USD/JPY relationship: the Fed's raising of the base interest rate and its indication that it intends to raise rates twice more this year. This should have caused the spread between US and Japanese rates to widen, since the monetary policies of the Fed and the Bank of Japan are divergent. The BOJ is committed to keeping rates ultra-low to stimulate growth. 

With the rates spreading, the yen should have shot back up towards its high last year of 118 yen to the dollar. However, it didn't. Instead, it poked upwards from 112 to 115 and then fell off dramatically, losing for eight consecutive trading days, eventually hitting a four-month low around 111, where it remained on Monday. 

The reason that interest rate spread didn't widen is that one side, the US long interest rate, failed to behave as investors expected. The Fed rate increase should have pushed the US 10-year Note to new highs, but instead, it pulled back even before the failure to pass a replacement to Obamacare. With doubts growing over Pres. Trump's ability to pass anything more than an incremental tax reform, interest rates are struggling. If Congress manages to pass a stimulus with substantial corporate tax breaks, interest rates may still rise and push the USD/JPY back above 115. However, the US is also reluctant to give a boost to Japan's already large trade surplus by helping weaken the yen. 

With tax and trade policy still up in the air, so is the fate of the USD/JPY. While that may be a challenge for long-term investors, it means opportunity for short-term traders. The trend since the start of 2017 is down and there's no sign that it has reversed yet. However, it just reached the Fibonacci 38.2% retracement level, which is also a well-established support level, and bounced last week. 

This can offer opportunities for trades in either direction, as long as you are aware of the context. If you decide to go long on a bounce, just be aware that the larger trend is still downward and don't get too complacent. And if you decide to short sell with the prevailing trend, be aware that it's at a crucial support level and may see digestion before it heads further down.

In either scenario, rather than trying to pick tops and bottoms, it may help to focus on your own risk and reward. With limited risk built into your binary options and spreads, it's easy to know your maximum risk. Once you've done that, identify the support and resistance levels and make sure you aren't entering just as a movement is exhausting itself. 

If you want a break from speculating on Brexit and the euro, take a look at the four different yen pairs which Nadex offers: the AUD/JPY, USD/JPY, GBP/JPY, and EUR/JPY. Japan is an economic power and market not to be overlooked in 2017. That may be why Donald Trump made Abe's visit the second of his presidency, after the visit from UK Prime Minister Theresa May. And unlike Abe, May didn't get a weekend in Mar-a-Lago. 


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