The AUD/JPY Seems To Provide A Good 1:3 Risk-Reward Ratio
Written by Michael Grogan
The Japanese Yen has taken quite a tumbling recently. See USD/JPY chart below. The necessity of quantitative easing in attempting to meet inflation targets, coupled with concerns of low domestic growth, have taken their toll on the currency of late. As far as the Aussie dollar is concerned, the AUD has been struggling to gain traction against the U.S. dollar, while ranging against other currencies such as the euro. This was expected given that commodity prices have been lower, and exports to neighbouring economies such as China had fallen.
However, since mid-June the yen has been appreciating significantly against many major currencies, including the Aussie dollar. The appreciation has been spurred mainly by comments from the Bank of Japan that a selloff of JPY is overdone. While such comments are not without precedent, the increase in the yen has coincided with a fall in the Nikkei 225 index, which has traditionally been inversely related to the yen.
On a weekly chart basis, the technicals of the AUD/JPY are quite interesting. For instance, from October 2014 to late January 2015, the currency pair had seen both a sharp appreciation and depreciation of over 12 percent within the space of one to two months. However, the AUD/JPY has been relatively stationary since then, with a slow and steady appreciation. However, given the appreciation of the yen there is a possibility that we will see a strong trend to the downside. So it is actually a good time to short AUD/JPY. This has the potential to provide a good set-up for a 1:3 risk-reward ratio. Accordingly, my trade is as follows:
- Entry via limit order: 92.5
- Take Profit: 88
- Stop Loss: 94
On the daily chart the SMA (20) had just dipped below the SMA (200) at a level of 95.40 and a continuing downward trend would breach the SMA (100) at a level of 94. Additionally, since June 26 the Average Directional Index has been sloping upwards to a level of 18, and a breach of the 25 level would serve as an indication that a downward trend is strengthening.