Volatility And Event Risk Produce A Quick GBPJPY Range Setup

Wednesday, 05 November 2008 22:40:55 GMT

Written by John Kicklighter, Currency Strategist

Even under normal circumstances, GBPJPY is an extremely volatile pair – and market conditions are still far from normal. Therefore, a short-term range opportunity for this pair must be played precisely to be pulled off.

Why Would GBPJPY Stay in a Range? Levels to Watch: -Range Top:       160.85 (Trend, Fib, SMA) -Range Bottom: 155.25 (Fib, Trend) Congestion seems to be a common theme across the market recently; but the short-term ranges nesting at the ends of major trends carries a substantial risk of breakout. Aligning ourselves to the larger trend in the market and in sync with the speculated outcome of the forthcoming event risk, we can set up a reasonable short-side range setup for GBPJPY as long as our strategy is sound and takes the timing of key indicator releases into account. Technicals are modest for the volatile GBPJPY. A short-term pennant formation is developing within a dominant bear trend. Resistance (our primary focus) is called up on a falling trend of high from last week and a notable Fib retracement that has also acted as a pivot. Support similarly has a trend and Fib. Suggested Strategy Short: Entry orders will be set at 160.50 which may be aggressive for the short-term trend.   Stop: The initial stop will be set beyond the falling trendline at 161.50. To protect profit, we will move the stop on the second lot to breakeven when the first target is hit. Target: The first objective equals risk (100) at 159.50. The second target will be 158.00.

Trading Tip – Even under normal circumstances, GBPJPY is an extremely volatile pair – and market conditions are still far from normal. Therefore, a short-term range opportunity for this pair must be played precisely to be pulled off. However, if the strategy and market unfold correctly, there may be a chance for a quickly-played and high-yielding setup. The strategy we are looking is good for a very short time frame; but could offer two potential scenarios for a setup. Everything will revolve around tomorrow’s top event risk – the BoE rate decision. If the pair bounces back up to the entry level before the announcement crosses the wires, it could provide the necessary momentum for a quick sell off. Our tight stop will ensure we are not caught in a lager breakout. Should we be far from entry, then the pair could easily bounce on a better than expected outcome and trigger our position. We will cancel all orders by Thursday’s close or should GBJPY break below the rising trend at 154. Also, since our suggested stop is somewhat wide at 100 points per lot, we will reduce our position size to reduce our risk.

Event Risk UK And Japan

UK – The Bank of England’s rate decision could easily be a major market moving economic event for the British pound. Considering how divergent the consensus between economists and traders is on the potential outcome, as well as the implications for the outlook for interest rates and growth in this event, there will be a lot of pressure and a relatively sensitive response to level of surprise. Heading into the event, the economist consensus provided by Bloomberg is calling for a 50bps cut to 4.00 percent; but overnight index swaps suggest the move is more likely to be 75bps. What’s more, the statement that usually accompanies a shift in policy could redefine expectations for the pace of rate cuts going forward. Looking at the rest of the economic docket for the coming week, there is no major release scheduled until after the weekend – outside of our trade period. 

Japan – Event risk from Japan has long had little effect on the yen; but the BoJ’s willingness to change the nation’s benchmark rate and the intensified focus on the local recession may draw more interest to the docket this week. What’s more, with a pair as volatile as GBPJPY, events can be amplified. Through our limited period for a potential trade, there is only one noteworthy indicator crossing the wires – the leading indicators index. As gauge for expansion over the following three months after the measure period, this may draw modest interest from fundamental traders. Otherwise, general risk trends will guide the yen (and more broadly this risk-sensitive pair). Ironically, should equities markets be encouraged by the ECB and BoE rate decision, we may still see GBPJPY rise on a rebound in risk appetite.

Data for November 6 – November 13			Data for November 6 – November 13
Date	UK Economic Data		Date	Japanese Economic Data
Nov 6	Bank of England Rate Decision		Nov 6	Leading Index (SEP P)
Nov 10	BRC Retail Sales Monitor (OCT)		Nov 9	Machine Orders (SEP)
Nov 10	RICS House Price Balance (OCT)		Nov 11	Eco Watchers Survey (OCT)
Nov 12	Jobless Claims Change (OCT)		Nov 12	Consumer Confidence (OCT)
Nov 12	BoE Quarterly Inflation Statement		Nov 12	Domestic CGPI (OCT)