Fundamental Top Level Market Overview
What's up traders in this weeks analysis based on feedback I've included a top level overview to give you traders the best information in as a little time possible! I've quickly used a traffic light system to identify what areas of analysis are ready, not ready and showing neutral or weaker signs. In the dark green areas we see that in the analysis the Marco Currency Strength Meter, Relative analysis (International Trade Analysis), Interest Rate analysis and the COT reports are looking in favour of our short idea this week and to the start of October. The rest are either not ready or not showing strong signs.
Logikfx Macro Currency Strength Meter
Our strongest signs were seen this week on the Macro Currency Strength Meter with JPY diverging towards a stronger macro score. This is also followed by the USD diverging into a negative region which overall gives us the idea to filter out the other currency pairs in the market and focus on USDJPY. Here since USD is weakening and JPY is strengthening on a macro fundamental basis we can look to short USDJPY. However! We need to also check the other economic variables to see if everything is aligning as we expect.
Logikfx Gross Domestic Product Indicator
Our GDP Indicator is on of our unique forex market tools to gauge economic strength and weakness and thus currency value. We developed this in house at logikfx so nothing else out there will be like it.
The values are showing currently in 2020 we have a negative differential, this is good for the time being but in 2021 it's forecast by the IMF that we might be seeing a US driven economic recovery which is stronger than Japan. Overall predicting the differential to be at least 2% in 2021 which is going against our overall market bias on USDJPY short. That's why I've highlighted it red on the market overview section above because currently it's not agreeing just yet.
Exxon Mobil Analysis
Exxon Mobil is an American Oil company which we like to analyse with most USD pairs due to the demand of refined and crude oil from the U.S. and the rest of the world. Here you can see when comparing USDJPY vs Exxon in the past 5 years which is the most recent relationship there's been a fairly positive correlation happening. So as Exxon prices fall, USDJPY seems to be following suit too. This is great for our USDJPY short idea overall with Exxon dropping 4% last month we can tick this off as ready.
WTI Crude Oil Price Analysis
On the flip side however for crude oil prices we have an inverse relationship. This is super interesting as normally we do see the USD have an inverse relationship against commodities. Recently Oil prices have started to make a small pullback which could mean that the USD is in an area of consolidation. It's probably why we've seen actually prices for USDJPY range the past couple years as oil prices go up and down in a similar fashion. Currently, this indicator is not ready and we can't tick this off just yet.
USDJPY vs Toyota Motor Corp
The United States and Japan are both large importers and exporters of commercial vehicles. Toyota is one of the worlds leading vehicle manufacturers so we've included this as an analysis point since it's a huge exporter in Japan. Overall, the results are amazing. We can clearly see positive signs in USDJPY and Toyota with almost a mirror line between the two. Recently Toyota has dropped from it's major highs since Feb and if global demand for cars continues to fall it's not going to look good for Toyota. However at this moment in time it's quite neutral as prices seem to be trying to make another upwards move after the retrace.
Interest Rate Differentials (Fed Rates vs BoJ Rates)
When comparing the Interest Rates against each other we saw them from 2010 start making an upwards move. This was followed by an upwards move in USDJPY. However only in recently years 2019 and 2020 we saw the interest rate differentials take a huge dip. Hitting 2.5% then dropping down to 0.25%. This is potentially very inflationary for USD which could see the USDJPY continue this sideways downtrend catching out lots of retail traders trying to long on each support level.
S&P500 (JPY) Stock Market Analysis
The S&P500 priced in JPY has been taking an upwards trajectory over the past 10 years. However in most recent years it's been very choppy for the markets. The last high made earlier this year took a huge dip due to the impact of the pandemic but has since recovered slightly due to monetary and fiscal support. However, now that it reached those highs again it took another small dip. This could see USDJPY on the short side as investors seek to protect their assets from deflation.
Commitment of Traders COT REPORT Forex Analysis
Overall as mentioned at the start in the market overview it's looking quite promising on a market sentiment level. USD Positions are starting to take a hit with hedge funds selling the dollar and at the same time they seem to be a bit more bullish on the JPY. Overall, this potentially signifies that we're on the right side of the market by trying to sell USDJPY so we can really focus on the fundamentals and technical analysis to try get a spot to get in.
USDJPY Weekly Price
On a weekly level for USDJPY it's been on a fairly consistent downtrend for a few years if the trend continues we may see the prices continue to fall like they did post 2008. I've currently highlighted the current price level with a 3% stop and 9% target of volatility. This is by no means an area of entry but to highlight the risk reward you should be setting yourself based on the volatility using our ATR calculator.
Here's the actualy figures on the ATR calcualtor for you to see the volatility over the past months to year. That's how we worked out the 3% stop and 9% target which you should be aiming for when trading USDJPY. You can also access the ATR calculator in the shop.
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Useful Reads:COT GUIDE: https://www.logikfx.com/post/using-the-cot-report-in-forex-trading-step-by-step-logikfx
Our Currency Strength Meter: https://www.logikfx.com/currency-strength-meter
How to make money trading forex: https://www.logikfx.com/post/how-to-make-money-trading-forex
Forex Trading Journal: https://www.logikfx.com/post/the-ultimate-trading-journal
How to set stop losses properly: https://www.logikfx.com/post/how-to-use-average-true-range-atr-for-stop-losses-and-take-profits