FX Trade of the Week | 7 - 11 January 2013

The trend is your friend. About two months ago, currency traders had reason to scoff at that old trader adage in light of the low volatility and relative lack of FX market direction so commonplace at the time. During the 7-11 January trading week, those who anticipated an extension of the recent eight-week euro yen trend were rewarded handsomely.

On Friday 16 November, I discussed in this market alert video the comments by Shinzō Abe which had sparked a notable Japanese yen sell-off over the prior two trading days. Roughly eight weeks and 1,400 pips later, one could not deny the trend which had unfolded on the EUR/JPY currency pair (see Chart 1).

The pair started the Thursday 10 January Asian trading session near 115 and the top of a recent triangle formation (see Chart 2).

During the early part of Thursday's London session, the EUR/JPY price broke above the top of the triangle. A euro yen long trade entry in the 115.10 to 115.15 zone was justified by not only a re-test of the top of the triangle [represented by the blue trendline on Chart 3], but also (a) a re-test of the early Asian session highs; (b) the 15-minute 21 ema -- a prospective source of dynamic resistance in this scenario -- parked near 115.10 at the time; and (c) the 50 percent Fibonacci retracement level of the rise from the Asian session low [1] to the early London session high [2] was positioned at 115.10.

News headlines over the subsequent 30 hours gave the euro yen long position a significant boost. The euro rallied after European Central Bank (ECB) president Mario Draghi stated during Thursday's ECB press conference that the central bank's decision to keep its benchmark rate at 0.75 percent was "unanimous." The Japanese yen declined further against the euro following poor Japanese current account figures released during Friday's Asian session. During the first hour of Friday's New York morning session, the euro rose sharply against multiple major currencies following reports that Goldman Sachs had recommended long euro-dollar positions (see Bloomberg article here).

Before Friday was in the books, the euro yen price saw the 119.30 level, its highest since Cinco de Mayo in 2011. The pair closed the week just shy of the 119 handle (see Chart 4). Traders who held the long position into the weekend were sitting on a roughly 380-pip trade.