 USDJPY:
The Dollar Yen trade, also known as the “Carry” has become a measure for risk appetite. There are several types of buyer in the market. You have buyers who believe what they are buying will appreciate and you have those who borrowed, or shorted a currency and now wish to buy it back to cover their short. Regardless of the reason, buyers drive price appreciation. However, buying to cover, is vastly different from buying to hold. Buying to cover is a means of removing risk from one's portfolio whereas shorting is a statement of risk taking, or reentering ones original position. Very often, when a reversal in sentiment occurs in a short time period, a chart pattern develops to help guide a trader with respect to entries and exits. On the chart below we see risk aversion followed by buyers returning to the market as they view the market to be oversold. Risk taking returns to the market and sellers create new weakness (in the JPY) as traders rush to get back into their original position. What we just described is a pattern known as a Head & Shoulders formation.
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