Talking Points:

- USD/JPY Risks Larger Pullback as Sentiment Wanes, RSI Flashes Sell Signal.

- NZD/USD Continues to Search for Support Amid Dovish RBNZ; RSI Divergence Remains.

DailyFX Table

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

USD/JPY

113.71

114.37

113.46

57

91

The Japanese Yen outperforms against its U.S. counterpart despite the slew of positive data prints coming out of the world’s largest economy, and the USD/JPY exchange rate stands at risk for a larger pullback as there appears to be a near-term adjustment in market sentiment.

Keep in mind the longer-term outlook for USD/JPY has perked up as the pair breaks out out of the bearish formation from late-2016, and dollar-yen may continue to recoup the losses from earlier this year as Fed Fund Futures now highlight a greater than 80% probability for a June rate-hike. Moreover, broader outlook for global benchmark equity indices remain constructive following the aftermath of the French presidential election, and the exchange rate may continue to track changes in risk sentiment as market participants utilize the Yen as a funding-currency.

USD/JPY Daily

USD/JPY Daily Chart

Chart - Created Using Trading View

  • The sharp rebound from the April low (108.13) may unravel as the pair struggles to clear the Fibonacci overlap around 113.80 (23.6% expansion) to 114.30 (23.6% retracement), while the Relative Strength Index (RSI) flashes a textbook sell-signal and pushes below 70.
  • With price & RSI coming up against trendline support, failure to preserve the bullish formations raises the risk for a larger pullback especially as risk appetite appears to be tapering off ahead of the weekend; will also keep a close eye on the 10-Day SMA (112.82) as the slope lines up with the upward trend carried over from the previous month.
  • In turn, the lack of momentum to break/close above 114.30 (23.6% retracement) may open up the downside targets, with the first area of interest coming in around 112.40 (61.8% retracement) to 112.80 (38.2% expansion) followed by 111.10 (61.8% expansion) to 111.60 (38.2% retracement).

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Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

NZD/USD

0.6847

0.6941

0.6818

93

123

NZD/USD tumbled to a fresh 2017-low of 0.6818 as the Reserve Bank of New Zealand (RBNZ) endorsed a dovish outlook for monetary policy, and the deviating paths continue to cast a long-term bearish outlook for the exchange rate especially as Governor Graeme Wheeler and Co. notes that the recent depreciation in the local currency ‘is encouraging and, if sustained, will help to rebalance the growth outlook towards the tradables sector.’ The New Zealand dollar remains at risk of facing additional headwinds in 2017 as officials continue to tame market expectations and stress ‘monetary policy will remain accommodative for a considerable period,’ but the recent decline in kiwi-dollar appears to be getting exhausted as the Relative Strength Index (RSI) diverges from price.

NZD/USD Daily

NZD/USD Daily Chart

Chart - Created Using Trading View

  • The recent decline adds to the longer-term series of lower highs & lows in the exchange rate, and the broader outlook for NZD/USD remains tilted to the downside as price & the RSI preserve the bearish formations carried over from 2016; next hurdle lies around 0.6790 (61.8% expansion) followed by the 0.6700 (61.8% expansion) handle.
  • However, the momentum indicator fails to show a similar dynamic as the oscillator still trades above oversold territory, and the string of failed attempts to close below the Fibonacci overlap around 0.6820 (23.6% retracement) to 0.6850 (38.2% retracement) may generate a near-term rebound in the exchange rate.
  • In turn, NZD/USD may consolidate and face range-bound conditions going into the end of the week, with the near-term outlook capped by the Fibonacci overlap around 0.6950 (38.2% retracement) to 0.6980 (23.6% expansion).

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IG Sentiment
  • Retail trader data shows 49.2% of traders are net-long USD/JPY with the ratio of traders short to long at 1.03 to 1. The number of traders net-long is 3.9% lower than yesterday and 7.0% lower from last week, while the number of traders net-short is 0.5% higher than yesterday and 4.7% lower from last week.
  • Retail trader data shows 51.7% of traders are net-long NZD/USD with the ratio of traders long to short at 1.07 to 1. The number of traders net-long is 0.9% higher than yesterday and 2.9% lower from last week, while the number of traders net-short is 14.0% higher than yesterday and 17.5% higher from last week.

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--- Written by David Song, Currency Analyst

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

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