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USDJPY: The "Safety Play" That Wasn't

This is why looking at market indicators other than the news can be a "safer alternative"

by Nico Isaac
Updated: July 07, 2017

Today, July 7, happens to be National Tell the Truth Day. So, what better time to ask the brutally hard questions, such as:

True or False: News events propel trend changes in financial markets?

Well, instead of answering out right, we'd rather let the markets decide for themselves using the recent performance of one of the world's most popularly traded currency pairs: USDJPY.

This June, the mainstream news circulating around the dollar/yen had one common theme: A rise in political uncertainty equaled a rise in the yen, considered a "safety play." Wrote one news source at the time:

"Analysts said the Japanese currency is finding buyers thanks in part to concerns about a rift between Qatar and other Mideast nations, as well as jitters around the UK election...

"Geopolitical risks are leading the direction. The dollar fell to its lowest level in six weeks against the yen. This shouldn't be surprising given the scale of event risks." (June 6 MarketWatch)

"Leading the direction"? Well, instead of steering the yen higher, as the news-led-markets-scenario intended, the Japanese currency turned down shortly after.

Which leaves the only other option -- something other than the news was at play here.

We believe that something else is investor psychology, which unfolds as Elliott wave patterns directly on a market's price chart.

On June 12, our Currency Pro Service analyst Tony Carrion published an intraday forecast for the USDJPY that made no mention of the external political climate in the currency's backdrop. Instead, Tony identified a significant bullish set-up on the USDJPY's price chart (i.e. rising dollar, falling yen) -- a soon-to-be-here third-wave advance:

"USDJPY has penetrated the corrective price channel, the first step we were looking for to confirm a bottom in wave 2 at 109.63. Since we don't have a clear five waves up yet, we'll want to see an advance above 110.44 to further establish the low is in place."

Image 1

Two days later, prices established the low and -- as the next chart shows -- embarked on powerful rally to two-month highs in the weeks that followed: (rising dollar, falling yen).

Image 2

So, on this day, July 7 -- and every other day to follow -- it pays to be honest: All too often, explanations rooted in "market fundamentals" are not really forecasting anything; they are simply rationalizing a move that's already happened.

You have to look at indicators other than the news to forecast the moves that aren't here yet.

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