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USDJPY short entry based on safe-haven flows

Traders are looking to park their clients’ money out of harm’s way whilst the situation in Ukraine worsens. Buying government debt or using a safe-haven currency along with gold is today’s theme.

During times of market turmoil, safe-haven investments are expected to retain or increase in value. During market downturns, investors seek out safe havens to reduce their exposure to losses. Depending on the specific nature of the down market, asset classes that are deemed safe havens may differ. Currently, we are seeing flows into gold, the Japanese yen, and the US dollar. The Swiss franc and government-issued debt is also a safer option at this time.

We are also seeing commodities rise but this is due to supply shock fears and this flow could easily flip-flop with volatility.

The reason for the Japanese yen to be considered a safe spot to park your cash is because of the liquidity which means if you need to quickly get out of a trade, you shouldn’t be locked in as the markets move against you.

Sentiment plays a large part in the yen safe-haven trade. With high indebtedness and low interest rates the only reason the yen is deemed safe is because that is the current consensus. The ActivTrader sentiment indicator is showing that 71% of traders on the platform currently view the yen a buy versus the US dollar and generally most of these traders are wrong. However, the flows are heading to the yen today.

The forex heatmap is showing that the yen and US dollar (world reserve currency) is relatively strong. This is due to the Russian military interventions into Ukraine, which could spark a full-blown war. Sanctions will be imposed to try and deter Russia but ultimately this means a major global economy will drag everyone else down too.

Not all government bonds and currencies are equally risk-on or off. Generally, a flight to safety means exactly that. You move your money out of a danger area, currently Russian and Ukraine, and put it somewhere which is not involved directly in the conflict or disruption. Countries and economies collapse when the money flows away.

Major countries are seeing flows into their government-issued bonds. We see this as the yields of the benchmark 10-year debt come lower. The yen and the US 10-year yields move together during market disruptions. So, US yields lower, USDJPY lower too. The yields are inverse to the moves in the nominal debt.

Looking at a daily chart of the USDJPY a break higher than the 115.348 would suggest that the retail traders are being squeezed out of their position, with 116 signaling that they are in fact wrong. A break lower than 114.15 and we could be in for a much larger drop.

On the chart above I have highlighted the most logical levels to trade towards. The double bottom at 113.46 and 112.52 will have sell stops sat there and therefore are a great liquidity pool for traders to get out of their shorts or into some long positions. Depending on your point of view.

All the way down to 109.90 would also be on the cards if the market wants to search out any resting orders. The fib extension to the downside is at 110.25 so 109 is definitely a consideration.

A low risk, high reward short would be to wait for a test of the 114.90 level and to place a stop above a swing high around 115.20. The lower levels have all been tested before so there should be few resting orders there. Plus, we removed whatever was sat below yesterday’s low in this morning's run down at the European open.


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