Even though China is making heavy waves in global events, especially when it comes to economics, its currency is not a free floating instrument as it should be. For all practical purposes, Renminbi remains pegged to the US Dollar, in spite of opposition of trading partners. In itself this subject has been and will be again explored in greater depth, so I won’t dive into it now, but this raises many questions by Forex traders. One of them is how to play the obvious connection between China, as major consumer of raw materials, and the countries she buys it from. Well, for the lack of better mechanism, many market players turn to JPY crosses as a substitute for CNY, imperfect as it may be.

Notion is based on Japan being the biggest trading partner on China and Yen acting as a proxy for Renminbi on international level. This relationship is most heavily weighted towards currencies of countries which are well known suppliers of commodities, namely Australia, Canada and New Zealand. Russia is also right there, but that is a very specific and unique case and story on its own. It also helps that Japan is a net importer of base materials from those countries, making JPY-CNY connection plausible for most analysts and, apparently, institutional Forex traders.

This, evidently, came to play last night, after announcement of Chinese economic output. Even though production expanded at the fastest rate in nine months in July, it fell short of expectations. This in turn put some doubt on future growth of Chinese suppliers and pulled their respective currencies down. Since Yen is a proxy for Renminbi, they fell heavily against Japanese Yen.  At about the same time, the Bank of Japan decided to keep interest rates on hold during its meeting. No new quantitative steps were announced, as expected, but somehow all this was a catalyst for Yen to make a run.

Few days ago I started to to short JPY pairs based, in part, on daily MACD divergence shown on some of these charts. Well, I decided to take a loss, when the turn around didn’t happen immediately, only to see markets reverse Sunday and Monday. Yesterday at this time the slide of AUD-JPY and CAD-JPY looked pretty much like a correction, but by the time news came out Asia about 12 hours later, the polarity has changed enough to try trades on a short side, using much shorter time frame, hourly charts.

I was still interested in the same two crosses. AUD-JPY retraced to the middle range of previous up swing and reacted with 100 SMA. It created very nice breakout set up. Price also indicated decent S/L point, so pout a sell order for at 80.32. Exit was manual for almost 100 pips. This pair shows massive support here from last week, plus it looks like the move is done for the day. Not to the pip, but in general. Also, hourly chart shows two distinctive swings down, so perhaps this move is taking a break until more news emerge. At any rate, I’m done for now.

The cross worked out even stronger. Set up for CAD-JPY was even better, stop loss much smaller. Past support broke like nothing and I let this run for a while longer. This trade was closed at the same time as AUD-JPY for a good gain. At this point it is hard to say if this is indeed a break I had been looking for on daily charts, but I feel that it is better to leave longer charts alone and concentrate on 4H and hourly graphs. It is far easier for me to adjust to changing, and confusing, market situation.

Yen pairs of interest either broke through or arrived at important recent lows. While this normally indicates change of direction, we had exactly opposite situation just last Friday. Clues are very misleading. However, given sheer size of this move, and without any truly shocking fundamental development, chances are high for a pause around here. Even if the sell off is for real, once the recent low is taken out, about 80% of the time markets will bounce, before proceeding. Only question is the size of that bounce.

With this in mind I went long GBP-JPY. Entry was at 1.5810. I have a set target at 1.6000, but exit will depend on price development. If it moves higher, 1.6030 level is the key. Getting past it indicates direction change once again. My feel is that moves will slow down now, for a day or two. I’m prepared to risk 60-80 pips here while in front of computer, maybe 100 if not watching the charts with hard stop.
I closed a trade in EUR-CHF from couple of days ago, for a small loss. Chart will be posted tomorrow. This post is becoming really long.

Mike K.