The Forex market is a typically easy to read and by that, I mean it’s easy to see what currencies strong and what currencies are weakening. Certain news events will help boost that strength or weakness but for the most part they have an ebb and flow that can be seen over all the major currency pairs traded in the world. Thursday was a rare exception that makes being in a pairing with the USD toxic. What traders will normally see if for example the dollar weakens the EURUSD, GBPUSD and AUDUSD all rising in price. The flip to that is dollar strength and the charts of the USDCAD, USDCHF, and USDJPY all rising as the UERUSD, GBPUSD and AUDUSD fall. There were times today when all of the eight largest currency pairs all had a negative 24hr pip change. The EURUSD, GBPUSD, and AUDUSD were all red in pip change having us believe there was dollar strength. But at the same time, we had the USDCAD, USDJPY and USDCHF red showing dollar weakness, and that’s where it gets strange. Everything that included the USD was negative since the Fed Funds rate changed on Wed. The rock, paper, scissors game isn’t working. Is the dollar strong or is the dollar weak?
The dollar index has narrowed into a $1.30 price channel over the last month, only $1 over the last two weeks. The stock market is red across the board with the Dow down almost 900 points on Thursday one day after the interest rates changed. Traders would have already priced that telegraphed rate change in though.
Given the current environment today, there are many ways to play tomorrow’s market. The two sides of this story are trying to jump on the weakness trend and ride the wave, but that is also one the easiest ways to lose money jumping in after a big more in price. The other option is find the strength out there see what type of opportunity exists on that side. One currency pair that has shown solid strength, and really the only one was the Japanese yen. At the current time this article is being written the USDJPY is down 80 pips in the last 24hrs, the AUDJPY down 110 pips and the GBPJPY down 156. Taking a look at the daily chart in the futures market we can see the yen has been on a strong uptrend since the start of the year. Following strength and playing it against weakness tends to offer good trading opportunities.
Dropping to smaller trading timeframes we can use multiple timeframe analysis to stay on the trend and watch for its eventual end. The daily chart had given us multiple entries to get short this pair and also more than a few areas of resistance if the price travels higher in a correction. Looking at the lower highs the downtrend is well established.
Lowering your timeframe to a H4 chart we can dial in a target and scout for problem areas. Traders will take notice of the 104.00 area though as there are a few candlestick wicks showing a bit of indecision in price. Below that area price shows a clear path down to 101.78. The daily ATR for the USDJPY is 77 pips so this turns into a multiday trade if price continues lower. It price establishes high lows and higher highs the trend is broken.