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Japanese Yen Talking Points

USD/JPY struggles to retain the advance from earlier this week as updates to the U.S. Non-Farm Payrolls (NFP) report does little to alter the monetary policy outlook, and the exchange rate now stands at risk for a larger pullback as the bullish momentum starts to abate.

Image of daily change for major currencies

USD/JPY Risks Larger Pullback as Bullish Momentum Abates

Image of daily change for usdjpy rate

The near-term rally in USD/JPY appears to have stalled ahead of the November 2017-high (114.74) even as the U.S. Unemployment Rate slips to the lowest level since 1969 as the 134K rise in NFP falls short of expectations for a 185K print.

Moreover, Average Hourly Earnings narrowed to 2.8% from 2.9% per annum in August, and signs of easing job/wage growth may continue to dampen the appeal of the U.S. dollar as the threat of a slowing economy limits the Federal Reserve’s scope to further embark on its hiking-cycle.

Image of Fed Fund Futures

However, fresh comments from New York Fed President John Williams, a permanent voting-member on the FOMC, suggest there’s little in the way to deter the central bank from implementing additional rate-hikes amid the ‘Goldilocks economy,’ and the central bank may continue to prepare U.S. households and businesses for higher borrowing-costs as ‘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.

With that said, Fed Fund Futures still reflect expectations for another 25bp rate-hike in December, and the recent shift in retail interest may continue to materialize over the days ahead amid the recent pickup in market volatility.

Image of usdjpy sentiment

The IG Client Sentiment Report shows 35.3% of traders are still net-long USD/JPY, with the ratio of traders short to long at 1.83 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 4.5% lower than yesterday and 11.0% lower from last week, while the number of traders net-short is 8.7% lower than yesterday and 1.8% higher from last week.

The material shift in retail position provides a contrarian view to crowd sentiment, which may persist over the near-term as USD/JPY pulls back from the monthly-high (114.55), and recent price action raises the risk for a larger correction as the Relative Strength Index (RSI) falls back from overbought territory and finally snaps the bullish formation carried over from the previous month. 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
  • Broader outlook for USD/JPY remains support as the exchange rate finally marks a closing price above the 113.80 (23.6% expansion) to 114.30 (23.6% retracement) region, but the lack of momentum to test the November 2017-high (114.74) raises the risk for a larger pullback.
  • In turn, the 112.40 (61.8% retracement) to 113.00 (38.2% expansion) region now sits on the radar especially as the RSI slips below 70 and flashes a bearish signal.

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

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Want to know what other currency pairs the DailyFX team is watching? Download and review the Top Trading Opportunities for 2018.

--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.