There is some opportunity here in the Forex market with an old favorite. Despite the fact that the target interest rate in Japan was recently moved to something greater than 0%, yield growth still looks more attractive in Europe.
What this means is that it is still expected to be cheap to borrow yen and buy higher yielding assets in some other currencies.
This is actually called a carry trade and the yen has been a favorite of carry traders for 6 years. There are many alternatives for higher yields but we will be looking at the EUR as the counterpart to the JPY in this case. An argument for a stronger JPY versus the USD is pretty good right now so that is the reason we are avoiding the USD base.
This is clearly a trend trade at this point and despite some strong movement recently, I still think that there is room following Friday’s pullback to slingshot the EUR/JPY into the 148.50 range. As you can see, in the chart above, a Fibonacci-based price target puts resistance at 148.58. I based this analysis on the trend break on 7/6/2006. Notice the nice bounce off the 100% level on 7/20/2006. So far this is looking pretty good.
I would add one caution to this analysis; trade reports due on Tuesday could really throw this off if the numbers are out of expected ranges. That means we can either sit by until the numbers are released or use some tight stops.
John Jagerson is a writer about and active trader in the Forex. His book, Profiting With Forex, published by McGraw Hill, will be released this July. This author also develops Forex education courses for INVESTools.com.