A Risk Reversal Could Finally Be Underway

The table could be turning for risk, with several JPY crosses looking like they’re finally topping out and due their anticipated corrections. With indices just off record highs and several markets pausing below key resistance (AUD/USD, EUR/JPY and USD/JPY, just to name a few), it suggests traders are hopeful US and China can sign this famous deal, yet doubts linger in the air. And with reports piling up that US and China aren’t likely to sign the famous “phase one” trade deal until December, then risk could be ripe for a correction. And this potential correction was flagged a couple of weeks ago with so many markets pausing at the said key levels. Now momentum has turned, the probability of downside for risk assets could be increasing, although equity markets are yet to play catch up.

AUD/JPY: A 2-bar reversal formed below the 200-day eMA. We outlined potential resistance following New Zealand’s weak employment data and it looks like a correction is underway. That said, we it appears NZD/JPY may provide better downside potential.
NZDJPY: A series of bearish pinbars stalled near the resistance cluster and beneath the bearish trendline. Moreover, price action has carved out a double top. Bearish momentum picked up at the end of the US session and carried through to Asia, and now on the cusp of breaking key support. Bears could target the lows around 68 and/or the lower trendline.
CAD/JPY: One of the stronger performers against the since the August lows, price action reversed after perfectly hitting the upper bounds of the channel. A lower high has formed with a dark cloud cover and prices are now trying to make their way to 81.83 support. If this level breaks, the lower trendline becomes the focus for bears.
EUR/JPY: has broken out of its 100-pip range to the downside after printing a bearish pinbar beneath resistance. Given the resurgence of dollar strength, EUR/JPY may be more appealing to bears than USD/JPY.

109.32 is clearly a big level for USD/JPY as its tired and failed to break this level three times. The Elongated bearish engulfing candle marked prominent resistance on the 1^st August and prices rolled over to print a fresh YTD low. Whilst a recovery saw it recoup losses, a bearish pinbar reaffirmed the key resistance levels, and prices have retreated from it once more with a bearish Harammi pattern today.

We could go as far to say that 109.32 could be the ‘phase one’ line in the sand so, without a deal, its hard to envisage a bullish breakout yet. Yet if we stand back there is the potential for a larger bearish wedge formation.

If successful, the bearish wedge projects a target near its base around 104.50. Bears could use a break of the bullish trendline, and target swing lows. However, we’d typically want to see direct losses out of such patterns (as it should be an impulsive move). So if the breakout lacks momentum, the probability of a failed pattern theoretically increases.
Bulls could wait for a break above 109.31. However, we’d want to see this done with decent momentum, otherwise it could just be the bearish wedge carving out another high. Obviously, we’d want to see risk-on generally for a bullish breakout which would require broad yen weakness, higher equities and yields.

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.