Investors were stunned to see the Dow Jones in the United States plummet by no less than 1000 points on Monday. The move seemed to have no floor and buyers were trying desperately to exit. Unfortunately, there was only one door and by the time margin calls were triggered, the move to the downside became so critical that USDJPY dipped all the way to 116 from 121.
Such a move is not unusual for the USDJPY. We have talked so many times about the risk on the pair being to the downside and here we are, the pair is trading below 120 and traders are looking for direction.
What’s next?
There’s little to fix this bubble and from my point of view. Not even the Fed in the United States can do much as they are trapped in a low growth environment. Their intentions to hike rates are unlikely with a market that is on its knees.
However, everything will change if next week’s NFP (Non-Farm Payrolls) number beats expectations, and all eyes will again be on the labor participation rate. Any sign that the downtrend there is about to end should see a sharp rally in both equities and the USDJPY pair.
Moving forward, I actually like buying dips in USDJPY now, all the way to the 122 area. However, these spikes should only be used for building a short position with way lower targets.
USDCAD lives in its own world as this currency pair is moving in only one direction, and yesterday saw the 1.33 level being broken. Each and every single dip has been aggressively bought, but I would still say the market is overreacting to both oil and the Bank of Canada rate hike. As a result, levels below 1.30 are most likely to come sooner rather than later.
For the rest of the week, expect economic releases to not really matter as the focus is on the equity markets. If we do not see a consolidation and stabilization there, then volatility is still going to be elevated.
Speaking of volatility, it should be noted that while this brings quick profits, it can also trigger huge losses. The key is to stay on the right side of the market, and be cautious.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
