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Japanese Yen Talking Points

The selloff in USD/JPY appears to have stalled ahead of the weekend as the exchange rate holds a narrow range, and dollar-yen may exhibit a bullish behavior over the coming days as it clings to the upward trend from earlier this year.

Image of daily change for major currencies

USD/JPY Clings to Bull Trend, Fed’s Evans Warns of Above Neutral Rate

Image of daily change for usdjpy rate

USD/JPY bounces back from the monthly-low (111.84) as the recent rout in risk appetite abates, and the broader themes surrounding foreign exchange markets may support dollar-yen throughout the remainder of the year as the Federal Reserve appears to be well on its way to implement higher borrowing-costs over the coming months.

Recent comments from Chicago Fed President Charles Evans, who rotates into the Federal Open Market Committee (FOMC) in 2019, suggest the central bank will continue to normalize monetary policy next year as ‘it’s time to readjust the policy stance, at least to neutral.’ In response to the ‘very strong economy,’ Mr. Evans warns that the FOMC could be forced to lift the benchmark interest rate ‘maybe 50 basis points above neutral,’ and a growing number of Fed officials may show a greater willingness to extend the hiking-cycle as FOMC largely fulfills its dual mandate for full-employment and price stability.

Image of fed fund futures

As a result, Chairman Jerome Powell and Co. may prepare U.S. households and businesses for an imminent rate-hike the next meeting in November, and Fed Fund Futures may continue to reflect expectations for a move in December as the central bank endorses a hawkish forward-guidance for monetary policy.

Keep in mind, the recent pickup in volatility spurred a material shift in retail interest, with the IG Client Sentiment Report still highlighting the change in sentiment as 45.2% of traders are net-long USD/JPY, with the ratio of traders short to long at 1.21 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 0.6% higher since then.

Image of IG client sentiment for usdjpy

Moreover, the percentage of traders net-long is now its highest since September 20 when dollar-yen traded near the 112.50 area as the number of traders net-long is 10.6% higher than yesterday and 4.0% higher from last week, while the number of traders net-short is 14.8% lower than yesterday and 25.5% lower from last week.

The skew in retail position may continue to offer a contrarian view to crowd sentiment as USD/JPY clings to the upward trend from earlier this year, with recent developments in the Relative Strength Index (RSI) also presenting a constructive outlook for dollar-yen as the oscillator reverses course ahead of oversold 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 attempts to break/close below the 111.10 (61.8% expansion) to 111.80 (23.6% expansion) area keeps USD/JPY within the upward trending channel from August, but need a move back above the 112.40 (61.8% retracement) to 113.00 (38.2% expansion) region to bring the topside targets back on the radar.
  • Next region of interest comes in around 113.80 (23.6% expansion) to 114.30 (23.6% retracement) followed by the 115.10 (61.8% expansion) hurdle.

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!

Additional Trading Resources

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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.