Nikkei has hit today a 15-month closing low while the Yen has hit a 15-year high against the dollar. The USDJPY broke 85, easily took out a bidding zone at around 84.80 and managed to reach 84.15 in the European morning as the Japanese Finance Minister Noda commented in a news conference that recent currency moves are one-sided, excessive and disorderly moves could harm the economy, and that he is closely monitoring currency moves with great interest (so do we!). Well, thanks mate, very inspiring comment! Still no comment on intervention. Then suddenly, at around 1.20pm London time, the pair dropped below the 84.00 mark as the EURUSD broke 1.26, maybe on anticipations of US figures from insiders or guys who pretend to be insiders I don't know but the thing is the existing home sales at 3.00pm actually were pretty bad (-27.2% MoM vs -13.4% expected)... The EURUSD as I write jumped back to 1.27, the USDJPY to 84 after it touched 83.6 and the Dow back from a journey down to 10K. A better than expected Richmond Fed may have helped, but I guess that's more on anticipation that FED will intervene further to the bad Economic figure or the correction of an overaction before, only TLofT knows. Back to the USDJPY, according to Informa (IGM) the bears now target a key downside objective around 83.51.
You know what ? I think I will face the train coming at full speed, try to catch the falling knife or do like in any expression used to refer to what NOT to do in trading : bet on a Japanese intervention to weaken the JPY and go long USDJPY. All the signals based on strength, momentum, speed,stop guns etc I usually use strongly tell me to go short, but I feel like playing the low probability event here and try to achieve the trading's most difficult trick : pick the reversal.
I may go long USDJPY the way I'd bet on sports (actually I don't), let me explain further. To some extent speculating on the markets meets betting on sports (horses, dogs, football whatever...) In sport betting, the quote you get for your bet should be (to be fair) the probabilty the event occurs plus the bookie's fee (the house edge), for instance if I bet TLofT football team to beat Spain in a game and I estimate the probability at 1/1,000,000, I expect to be have a quote close to 1,000,000 to 1 if I win (actually the fair price is 999,999 to 1). The thing with sport betting is because of the bookie, you're paid less than the actual probability and it means that in the long run, you'll always lose (you have a negative expectancy). The better way to bet (I guess, once again I don't bet on sports, I can't have all the vices at the same time) is to look for good value bets, meaning bets where you think that the bookie mispriced the probability. The mispricings are more likely found in what is hard to price (obviously) and particularly the unlikely events. To illustrate this, let's go back to the World cup last summer : before it started, "Spain to win" was quoted around 4 to 1 meaning that the bookies estimated the probability at 20%. Even with the insight of knowing the result, I'd say it was not a good value deal (just consider that Brazil was quoted 4 to 1 too if you find it hard to consider a winning deal a bad deal). In comparison, "Germany to beat England in penalty shoot outs" that quoted 9 to 1 (10%) before the game had a much better value (consider "Germany to beat England with a spread of 3 goals" if you find it hard to consider a losing deal a good deal). On one deal, you are more likely to win with bets of the kind of the former, but in the long run, you'll be better off with the kind of the latter.
To be back to the USDJPY, as I feel more and more players turn into Bears and fear would push higher the JPY, that we all know the Japanese government is "culturally" not used to intervene, that the several comments from officials suggest that time to intervene has not come yet (and the Lord of Trading knows that before a devaluation, the finance minister ALWAYS deny any intervention). I believe the good value deal is in a bet for an intervention, but at the same time, I lost too much money already trying to pick bottoms. So the consensus would be to put on a low risk high profit long trade, just in case I'm right. Now I'd understand if it sounds to you like I'd be gambling here. I've to confess it would be true to some extent...
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FYI As this post is published: SPX 1057 // SX5E 2611 // NKY 8995 // DAX : 5926 // EURUSD 1.2683 // USDJPY 84.04 // XAUUSD : 1234
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