(As written for My Paper on 28 February 2012. Click here to enlarge)
I am back in Singapore after speaking in the “China International Investment and Finance Expo 2012” held in Guangzhou.
Although China has announced slowdowns in manufacturing, exports and housing, the Forex community there seems to suggest otherwise with the buzz in the Expo.
Speaking of buzz, the buzzword this week is “profit-taking.”
Many currency pairs rallied last week with the finalisation of Greece’s second bailout package. Here’s a snapshot of how some of them fared:
- EUR/USD – shot up 300 pips
- GBP/USD – shot up 250 pips
- USD/JPY – shot up 200 pips
- AUD/USD – shot up 155 pips
The big question is, “will they continue their ascent this week or will there be a retracement?”
The answer, is a retracement.
By definition, a retracement is simply a temporary reversal that goes against the prevailing trend. It does not however, signify a change in the actual trend.
The main reason for the expected retracement is profit taking.
After going “Long” on several currency pairs last week, some traders are inclined to bank in some profits. This will cause some of the currency pairs to drop off from their highs last week.
One of the big moves which had traders scratching their heads last week was USD/JPY. Although the focus was squarely on Europe, USD/JPY was making steady gains, reaching a high of 81.67 – a level not seen since 31st May 2011.
There are 3 reasons for the rise in USD/JPY:
- Rise in oil prices – With the sanctions on Iran’s nuclear program, oil prices are steadily climbing, coming just shy of $110/barrel. Japan imports about 97% of its total oil consumption, which means more Yen must be sold to purchase oil. This leads to a drop in the Japanese currency.
- Increasing US yields – USD/JPY is a currency pair which moves in tandem with the yield differential of US against Japan. 2 year yields for US Treasuries have been rising, which will increase the demand for US dollars, thus pushing the US dollar higher.
- Asset Purchases – The Bank of Japan said earlier this month that it aimed for 1% annual gains in consumer prices and would add 10 trillion yen to the economy. This caused bullish bets on the Yen to fall by 70% from the end of last month.
Another reason for profit-taking this week comes from the main takeaway point of the G20 meeting over the weekend in Mexico City:
“The world economy is not out of the danger zone amid fragile financial systems, high debt and rising world oil prices,” said IMF Managing Director Christine Lagarde.
Top News This Week
Canada GDP m/m. Friday, 2 March, 9.30pm. I expect figures to come in at 0.3% (previous figure was -0.1%).
Trade Call
Long CAD/JPY at 80.60
On the H1 chart, CAD/JPY has been on a steady rise, clearing over 440 pips in 2 weeks. With the profit taking on several currency pairs including oil, CAD/JPY is expected to retrace before continuing its ascent.
We will place a pending buy order once prices retrace and bounce off the conversion area of 80.53. Entry is taken at 80.60. A protective stop of 65 pips is placed below the last low of 80.02, and below the round number of 80.
We will have 2 targets on this trade, exiting the final position at 81.90.
Entry Price = 80.60
Stop Loss = 79.95
1st Profit = 81.25
2nd Profit = 81.90
