Hedging with Yen on diverging sentiment

What is your position on the Yen? How about bearish against bulls and bullish against bears? Any JPY trade combination acts as a partial hedge right now, but only if your trade entries make sense. There are currently several fundamental factors influencing currency prices right now. The talk of a rate hike in U.S. has gotten many traders on the bullish side. I believe the rate hike will be delayed and end up being dragged out into a much further time horizon due to unemployment claims. The high USD value is not a good sign for jobs as exports fall along with oversupply of crude. Meanwhile, the EURO and AUD are still being devalued. This presents a trading opportunity for the Yen based on a few technical setups.

The first is going long on USDJPY. I’m actually already in this position, but I wouldn’t say it is too late to get in on it for the long haul. News are floating around as to whether this pair get hit 1.40~. Regardless of if it does, trade the break-out on this one.

USDJPY Break-Out
USDJPY Break-Out

The logic behind this trade is that you are essentially bullish on the USD and bearish on JPY or the Yen. In other words, selling Yen to buy USD.

While this is happening, there are still a couple of pairs where you can long or buy the Yen. The first is AUDJPY.

AUDJPY Bearish Break-Out
AUDJPY Bearish Break-Out

One of the pairs selling off is the AUDJPY. I place a price target on the upper bound support zone at 86.50~. This movement has approximately another 560 pips to go before any turnaround. At this point, any turnaround due to fundamental factors is unlikely. By shorting this pair, you are essentially selling AUD and buying the Yen.

By doing so, you are both long and short the Yen and playing off of the USD strength and AUD sell-off. Of course, this is not a perfect hedge, but it does offset some especially as you are trading the long term trend.

Furthermore, it is also possible to weight the Yen trading with twice the volume on USDJPY and split off the other side with AUDJPY as well as NZDJPY. At the time of this writing, the RBNZ rate and monetary policy statement are soon to be released – in one hour to be exact. For the time being, it is probably better to wait until after this statement is released in order to avoid losses due to the fundamental factors. However, this pair also plays well into a trend following short trade.

NZDJPY Short Trade
NZDJPY Short Trade

As you can see, price broke through the 50.0% Fibonacci retracement level. The next test is the 61.8% level at the 86.740 price level. In the event that this trade must be cut short, closing it out at this price level would net approximately a 70 pips gain. If holding this trade for a much longer time duration, hitting the upper bound demand zone would net just a tick under 300 pips.

It is possible to use either one of these pairs to trade against the USDJPY pair or split it off. To trade directly against USDJPY, you would go long USDJPY with a volume of 10,000 and short either AUDJPY or NZDJPY 10,000 units. To split this off, you would short both AUDJPY and NZDJPY 5,000 units each. If you really want to go into the math to find the absolute trade value, the volume to short would be slightly. Again, this is a partial hedge. It is not perfect, but it does help you offset the risk while you hold out these trend-following trades.

 

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