Japanese Yen Top Performer Yet Again - Why is This Significant?

DailyFX

- Japanese Yen is the leading currency yet again, tells us what to expect in week ahead-Our focus shifts towards Yen trading via our Breakout2and Momentum2systems- It will be critical to watch the first full week of 2014 price action

The Japanese Yen has started the week as top-performer yet again, while the Dollar likewise gains. What does this tell us for price action in the weeks, month, and year ahead?

Traders pushed the Japanese currency to fresh multi-year lows in the final months of 2013, and the fact that it has reversed notably into the first few days of the New Year is significant. Why?

We wrote last week on why the JPY went from last-to-first in a hurry: namely, traders were taking profitable JPY-short positions (USDJPY, EURJPY, GBPJPY longs) off the table. Indeed, speculators were recently at their most short the Yen on record. The first sign of danger could spark a pronounced flight to safety and bigger JPY moves.

Focus thus rests on general ‘fear’ metrics and trade setups that could do well in such market conditions. For currency trading we look to FX Options volatility prices, which have trended higher and point to bigger JPY and USD moves in the weeks and months ahead.

Forex Volatility Prices Remain Elevated, Signaling Potential Market Turmoil Ahead

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forex_strategy_japanese_yen_leads_and_tells_us_about_2014_body_Picture_1.png, Japanese Yen Top Performer Yet Again - Why is This Significant?

Source: OTC FX Options Prices from Bloomberg; DailyFX Calculations

What would those trades look like? Our sentiment-based forex trading strategies tend to outperform in times of strong trends and fast-moving markets. And though past performance is not indicative of future results, the Momentum2 system has done fairly well in recent market conditions.

If market conditions do in fact become strained and volatility rises substantially, we would then look to our volatility-friendly Breakout2 strategy as our preferred tool to take advantage of market shifts.

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DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

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forex_strategy_japanese_yen_leads_and_tells_us_about_2014_body_Picture_2.png, Japanese Yen Top Performer Yet Again - Why is This Significant?
forex_strategy_japanese_yen_leads_and_tells_us_about_2014_body_Picture_3.png, Japanese Yen Top Performer Yet Again - Why is This Significant?

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--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

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Definitions

Volatility Percentile – The higher the number, the more likely we are to see strong movements in price. This number tells us where current implied volatility levels stand in relation to the past 90 days of trading. We have found that implied volatilities tend to remain very high or very low for extended periods of time. As such, it is helpful to know where the current implied volatility level stands in relation to its medium-term range.

Trend – This indicator measures trend intensity by telling us where price stands in relation to its 90 trading-day range. A very low number tells us that price is currently at or near 90-day lows, while a higher number tells us that we are near the highs. A value at or near 50 percent tells us that we are at the middle of the currency pair’s 90-day range.

Range High – 90-day closing high.

Range Low – 90-day closing low.

Last – Current market price.

Bias – Based on the above criteria, we assign the more likely profitable strategy for any given currency pair. A highly volatile currency pair (Volatility Percentile very high) suggests that we should look to use Breakout strategies. More moderate volatility levels and strong Trend values make Momentum trades more attractive, while the lowest Vol Percentile and Trend indicator figures make Range Trading the more attractive strategy.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES IS MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION.

OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as general market commentary, and does not constitute investment advice. The FXCM group will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance contained in the trading signals, or in any accompanying chart analyses.

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