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USDJPY Likely to Continue Higher For These 3 Key Reasons

By , Quantitative Strategist
15 November 2013 16:15 GMT

The dollar continues its surge against the Japanese Yen, and we favor further USDJPY gains for these three reasons.

1. A significant break in the Japanese Nikkei 225 likewise favors a higher USDJPY.

2. A surge in US Treasury Yields boosted the USDJPY earlier in the week

3. A substantial shift in trader sentiment favors Japanese Yen weakness

USDJPY Surges and Trades Towards September Peaks at ¥100.60

forex_trading_USDJPY_likely_to_rally_for_three_reasons_body_Picture_5.png, USDJPY Likely to Continue Higher For These 3 Key Reasons

Source: FXCM Trading Station Desktop, Prepared by David Rodriguez

Below are two charts that emphasize the significance of the break higher in the Nikkei as well as US Treasury Yields.

Correlation between USDJPY and Nikkei 225 Remains Strong

forex_trading_USDJPY_likely_to_rally_for_three_reasons_body_Picture_6.png, USDJPY Likely to Continue Higher For These 3 Key Reasons

Data source: Bloomberg

USDJPY Surges and Trades near Critical Resistance as Yields Rise

forex_trading_USDJPY_likely_to_rally_for_three_reasons_body_Picture_7.png, USDJPY Likely to Continue Higher For These 3 Key Reasons

Data source: Bloomberg

Our retail forex trader sentiment sample likewise shows a substantial shift in FX trading sentiment. Yesterday we highlighted this shift as a major reason that the USDJPY would likely trade higher.

Forex Trading Crowds Sell Aggressively into USDJPY Gains, Favoring Continued Rallies

forex_trading_USDJPY_likely_to_rally_for_three_reasons_body_Picture_8.png, USDJPY Likely to Continue Higher For These 3 Key Reasons

Source: FXCM Execution Desk Data

Retail forex short interest in the USDJPY has surged 140 percent since last week and is now at its highest since the pair traded above ¥103 in May. Our sentiment-based Momentum2 system remains long USDJPY from ¥99.06.

Obviously any important shifts in price and sentiment could derail our USDJPY-bullish forecast. But in the meantime we like trading it higher. Sign up for future e-mail updates via my e-mail distribution list.

Forex Correlations SummaryView forex correlations to the S&P 500, S&P Volatility Index (VIX), Crude Oil Futures prices, US 2-Year Treasury Yields, and Spot Gold prices.

forex_trading_USDJPY_likely_to_rally_for_three_reasons_body_Picture_9.png, USDJPY Likely to Continue Higher For These 3 Key Reasons

Data source: Bloomberg. Chart source: R SEE GUIDE ON READING THE ABOVE CHART

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com David specializes in automated trading strategies. Find out more about our automated sentiment-based strategies on DailyFXPLUS.

Contact and follow David via Twitter: https://twitter.com/DRodriguezFX

15 November 2013 16:15 GMT