Bullish USD/JPY Outlook Mired by Dovish Fed, Wait-and-See BoJ
See how retail traders are positioning in the majors using the FXCM SSI readings on DailyFX's sentiment page
The diverging paths for monetary policy fosters a long-term bullish outlook for USD/JPY, but the Federal Reserve’s and the Bank of Japan’s (BoJ) wait-and-see approach may continue to drag on the exchange rate especially as Janet Yellen and Co. look to further delay their normalization cycle.
With Fed officials now projecting two rate-hikes for 2016, the less-hawkish stance accompanied by the downward revision in the growth rate may keep the dollar under pressure even as the U.S. economy approaches ‘full-employment.’ The external risks surrounding the region may encourage the Federal Open Market Committee (FOMC) to stay on hold throughout the first-half of this year, and Chair Janet Yellen may make further attempts to buy more time amid the slowdown in the global growth. With that said, the cautious outlook laid out by the FOMC may continue to drag on interest-rate expectations and spur further losses for the greenback as the Fed forecasts remain susceptible to a further downward revision at the next quarterly meeting in June.
At the same time, the BoJ may stick to the sidelines for the foreseeable future and may even scale back its willingness to implement more conventional/nonconventional tools as the central bank continues to gauge the impact of negative interest rates. In turn, Governor Haruhiko Kuroda may strive to jawbone the local currency especially as the central bank struggles to achieve the 2% target for inflation, but the slowdown in the global economy accompanied by the decline in risk-appetite may continue to boost the appeal of the Japanese Yen as it largely preserves its role as a funding/safe-haven currency. With Japan moving back to its historic current-account surplus, the improvement in the Balance of Payments (BoP) may spur greater demand for the Yen as the world economic outlook remains clouded with high uncertainty.
As a result, the dollar-yen may depreciate further over the coming months as U.S. interest-rate expectations come under pressure, while efforts by the BoJ to weaken the local currency may ultimately fail to bear fruit especially as global investors scale back their appetite for risk.
Japanese Yen’s ‘Funding-Currency’ Status Raises Risk for Larger USD/JPY Correction
The Japanese Yen’s ‘funding-currency’ status may continue to play a key role in dictating price ahead of the key interest rate decisions as USD/JPY broadly moves in tandem with the global benchmark equity indices.
USD/JPY & S&P 500
Data source: Bloomberg. Chart Prepared by David Song
Indeed, efforts by the community of global central bankers to avert a further slowdown in the world economy may prop up market sentiment, but fear of a ‘hard-landing’ in China paired with the weakened outlook for Emerging Markets may continue to sap investor confidence and spark a further unwinding of the ‘carry trade.’ In turn, shifts in risk trends may largely accompany turns in USD/JPY as market participants weigh the outlook for monetary policy.
Technical Analysis: USD/JPY Forecast to Hit Lows
Chart source: TradingView. Prepared by David Rodriguez
Our technical forecast for the USD/JPY has turned firmly bearish as the pair breaks sharply below its 52-week Simple Moving Average and trendline support (not shown). Past performance is not indicative of future results, but the 52-week SMA has for the past several decades marked the major USD/JPY trend. Or in other words, trading below the key moving average has marked downtrends and trading above has marked uptrends. We feel that this instance could be similar, and notable trader positioning acts as further confirmation.
CFTC COT Data Shows Net Non-Commercial Positions now Sharply Net-Short
Data source: CFTC Commitment of Traders data, Bloomberg. Prepared by David Rodriguez
The important technical shift has likewise coincided with a sharp turn in sentiment. CFTC Commitment of Traders data shows Net Non-Commercial futures positioning is now sharply net-short the USD/JPY (long JPY futures)—a dramatic move from only a year ago when the opposite was true. Large speculators are positioned for continued USD/JPY weakness, and the severity of the shift underlines the extent to which traders believe the pair will continue lower. – DR
DailyFX Market Opinions
Any opinions, news, research, analyses, prices, or other information contained in this report is provided as general market commentary, and does not constitute investment advice. DailyFX will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
Accuracy of Information
The content in this report is subject to change at any time without notice, and is provided for the sole purpose of assisting traders to make independent investment decisions. DailyFX has taken reasonable measures to ensure the accuracy of the information in the report, however, does not guarantee its accuracy, and will not accept liability for any loss or damage which may arise directly or indirectly from the content or your inability to access the website, for any delay in or failure of the transmission or the receipt of any instruction or notifications sent through this website.
This report is not intended for distribution, or use by, any person in any country where such distribution or use would be contrary to local law or regulation. None of the services or investments referred to in this report are available to persons residing in any country where the provision of such services or investments would be contrary to local law or regulation. It is the responsibility of visitors to this website to ascertain the terms of and comply with any local law or regulation to which they are subject.
High Risk Investment
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain losses in excess of your initial investment. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.