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Japanese Yen Talking Points

The recent rally in USD/JPY appears to have stalled ahead of the November 2017-high (114.74) as the exchange rate snaps the recent series of higher highs & lows, but there appears to be a broader shift in market behavior amid a jump in retail short interest.

Image of daily change for major currencies

USD/JPY Rate Snaps Bullish Sequence, Short Interest Jumps

Image of daily change for usdjpy rate

USD/JPY pulls back from the 2018-high (114.06) as Fed officials strike a cautious tone, with Boston Fed President Eric Rosengren warning that the U.S. economy flashing ‘a bunch of yellow lights,’ and another batch of lackluster data prints may keep the dollar-yen exchange rate under pressure as the ISM Non-Manufacturing survey is anticipated to show the index narrowing to 58.0 from 58.5 in August.

Signs of waning business confidence may encourage the Federal Open Market Committee (FOMC) to keep the benchmark interest rate on hold at the next meeting in November as the trade war with China dampens the outlook for growth, but the data prints may do little to derail the central bank from its hiking-cycle as Chairman Jerome Powell & Co. reiterate that ‘the Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term.’

Image of fed fund futures

With that said, expectations for a less accommodative stance should keep USD/JPY bid as Fed Fund Futures continue to highlight bets for another 25bp rate-hike at the next quarterly meeting in December, and the exchange rate may exhibit a bullish behavior over the remainder of the year especially as the Bank of Japan (BoJ) remains in no rush to move away from its Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control.

Image of IG client sentiment for usdjpy

Nevertheless, the IG Client Sentiment Report now shows33.9% of traders are now net-long USD/JPY, with the ratio of traders short to long at 1.95 to 1. In fact, traders have remained net-short since September 13 when USD/JPY traded near the 111.20 region even though price has moved 2.3% higher since then. The number of traders net-long is 4.7% higher than yesterday and 9.8% lower from last week, while the number of traders net-short is 13.7% higher than yesterday and 37.5% higher from last week.

The material shift in retail interest provides a contrarian view to crowd sentiment, which looks poised to persist over the near-term, and the outlook for USD/JPY remains supportive ahead of the U.S. Non-Farm Payrolls (NFP) report as the Relative Strength Index (RSI) preserves the bullish formation carried over from the previous month. However, lack of momentum to hold above 70 may spur a near-term pullback in the dollar-yen exchange rate as the oscillator falls back from overbought territory. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

USD/JPY Daily Chart

Image of usdjpy daily chart
  • The failed attempt to break/close above the 113.80 (23.6% expansion) to 114.30 (23.6% retracement) region may curbs the near-term outlook for USD/JPY, with the 112.40 (61.8% retracement) to 113.10 (38.2% expansion) on the radar as the exchange rate also snaps the bullish series from earlier this week.
  • Need a close above the Fibonacci overlap around 113.80 (23.6% expansion) to 114.30 (23.6% retracement) to open up the November 2017-high (114.74), with the next region of interest coming in around 115.10 (61.8% expansion) followed by the 116.00 (23.6% expansion) to 116.50 (78.6% expansion) area.

For more in-depth analysis, check out the Q4 Forecast for the Japanese Yen

Interested in having a broader discussion on current market themes? Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.