USD/JPY Outlook Turns Bearish as BoJ Endorses ’Yield Curve Control’

2016-09-22 17:30:00 David Song

Talking Points:

- USD/JPY Outlook Turns Bearish as BoJ Endorses ‘Yield Curve Control,’ Retail Positioning Remains Stretched.

- USDOLLAR Remains Stuck in Near-Term Holding Pattern; Outlook Mired by Lower Path for Fed Funds.

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Chart - Created by David Song

The near-term outlook for USD/JPY is becoming increasingly bearish as the pair breaks down from the triangle/wedge formation carried over from the previous month, with the Relative Strength Index (RSI) highlighting a similar dynamic; the downward trend from earlier this year may reassert itself going into the last full-week of September as market participants mull the implications of the Bank of Japan’s (BoJ) ‘Quantitative and Qualitative Monetary Easing with Yield Curve Control;’ the move casts doubts on the efficacy of the negative-interest rate policy (NIRP) as the central bank keeps the benchmark interest rate unchanged.
Efforts by Governor Haruhiko Kuroda and Co. to overshoot the 2% target for price growth may help to anchor inflation-expectations as the central bank keeps the door open to further embark on its easing cycle, but the adjustment to the asset-purchase program may not prove enough to weaken the Yen as Japan remains a net-lender to the rest of the world.
Failure to preserve the holding pattern raises the risk for a further decline in USD/JPY, with a break of the August low (99.53) exposing the next downside area of interest coming in around 98.30 (38.2% & 78.6% retracements).

The DailyFX Speculative Sentiment Index (SSI) shows the FX crowd has been net-long USD/JPY since July 21, with the ratio hitting a 2016-extreme during in August as it climbed to +5.28.
The ratio remains elevated as it sits at +4.45, with 82% of traders long, while retail long positions have climbed 69.5% from the previous week.
The SSI may continue to serve as a contrarian indicator as the retail crowd remains stuck on the wrong side of the market and fades the near-term strength in the Japanese Yen.

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USDOLLAR(Ticker: USDollar):

Index	Last	High	Low	Daily Change (%)	Daily Range (% of ATR)
US Dollar Index	11916.87	11932.91	11899.38	-0.12	58.04%

Chart - Created by David Song

Even though the USDOLLAR largely preserves the triangle/wedge formation following the Federal Open Market Committee (FOMC) interest-rate decision, the greenback remains at risk of facing headwinds over the near to medium-term as central bank officials project a lower path for interest rates; seems as though the Fed will follow a similar path to 2015 amid the growing dissent within the central bank.
Indeed, Chair Janet Yellen argued November remains a ‘live meeting’ as Fed officials see a growing argument to raise the benchmark interest rate, but the committee may stick to the sidelines ahead of the U.S. Presidential election amid the uncertainty clouding the fiscal outlook.
Will continue to watch the monthly range as the USDOLLAR remains stuck within the triangle/wedge formation carried over from the summer months, with a break/close below 11,898 (50% retracement) to 11,914 (38.2% retracement) raising the risk for a move back towards 11,822 (23.6% retracement) to 11,843 (38.2% retracement).