USD JPY

Predictions abound that USD/JPY will continue to weaken since Japan may not support US assets at the same rate as before. The reasons for Yen appreciation against the Dollar are not entirely convincing yet. One must realize a lot of this is political talk and markets usually don’t change at the speed of political words- rather, they move fast when big positioning imbalances give out.

The fact that big exporters like Toyota weakened on the news isn’t good for the Yen. Any sustained Yen strength (i.e. below 90) is bad for the Japanese economy because it is still not out of the woods yet. Even though the party has expressed that it doesn’t care as much about the strong yen affecting the economy, the Ministry of Finance (who instructs the BOJ on whether to intervene) is an independent administrative institution.

It would be best to wait out this scenario to let traders show their hand. If price ventures lower and gets rejected, that’s a powerful indicator that not much force is supporting the Yen. Of course if there is a sustained downward push and the market has adopted this view, there may be a nice long-gamma, short USDJPY opportunity.

The market fears that people will stay at home and if 100 million people die due to an epidemic like in 1918 then the global economy would accelerate into a giant depression. This is scary, and there is a small possibility that something like this could happen as history teaches us. However, it’s our job as traders not to trade coulds, woulds, and shoulds. What’s happening right now is a classic example of “framing” behavior. I explain this in the special report, but basically this means that the market has a bias to focus on too narrow of a view of available information and use that to draw conclusions or predictions about price. There are other big problems in both Europe and the US that must be considered: the debt situation in the US, how far the Eurozone is willing to go with pumping money into the economy, etc. We saw market reactions to the SARS outbreak in 2003 and the Foot and Mouth disease in the UK in 2007. In both cases there was an initial flight to liquidity and then return to initial levels and higher.

Any further fast moves down in EUR/USD will be illiquid ones. Even though sentiment seems to lean toward USD strength, there may be a possibility to enter long on the Euro after a spike down and hold for a couple hundred pips profit after price swings in this random zone driven by fluctuating market sentiment. The key is to keep leverage small and limit your risk to the downside in case the epidemic does indeed turn out to be what everyone has feared. Note this is only for a spike down due to the swine flu outbreak, NOT news on bank failures or the ECB implementing massive money injections. It is important to have a reason for entering other than just price.

I would like to close by saying that I am by no means making light of the situation. I was living in Singapore during the SARS outbreak of 2003 and can relate to the unfortunate circumstances. My prayers are for protection of people across the globe.

All the best in your trading,

Kris M

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