USDJPY – In the past two months we have argued enthusiastically in favor of US Dollar strength against the Japanese Yen and a lasting USDJPY bottom. Yet the most recent shift in FX options and futures sentiment, and clear historical Japanese Yen patterns pointed to a short-term JPY reversal. The next question is obvious: how far do we think the USDJPY could go before resuming its broader reversal?
Monitoring slower-moving FX Options and Futures sentiment is in this author’s opinion an excellent way to gauge broader trends. Non-commercial futures traders (large speculators) are their most short Japanese Yen (long USDJPY) since the pair set a significant top near ¥85. A big reason we liked a USDJPY long was the fact that very few expected it. Now it seems that speculators have caught onto the move, and that in and of itself is a reason for rallies to slow or even retrace.
Futures data is great, but we only get the Commitment of Traders report once per week and on a 3-day delay. This is where the SSI steps in: it has historically been a stronger market timing tool than the slow COT figures. We might call for resumption in USDJPY rallies if retail trading crowds suddenly start selling. In the meantime, however, continued USDJPY weakness seems likely.
How do we interpret the SSI? Watch an FXCM Expo Presentation that explains the SSI.
--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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