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

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

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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USD/JPY Daily Chart

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.

Why and how do we use the SSI in trading? View our video and download the free indicator here

USDOLLAR(Ticker: USDollar):

IndexLastHighLowDaily Change (%)Daily Range (% of ATR)
US Dollar Index11916.8711932.9111899.38-0.1258.04%
USDOLLAR Daily Chart

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).
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--- Written by David Song, Currency Analyst

To contact David, e-mail Follow me on Twitter at @DavidJSong.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.