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Japanese Yen Talking Points

The recent rally in USD/JPY appears to be sputtering ahead of the 2018-high (114.55) as the U. of Michigan Confidence survey does little to boost the economic outlook, and recent price action raises the risk for a larger pullback as the exchange rate fails to extend the series of higher highs & lows from earlier this week.

Image of daily change for major currencies

USD/JPY Bullish Sequence Fizzles as U. of Michigan Fails to Impress

Image of daily change for usdjpy rate

USD/JPY struggles to hold its ground as the U. of Michigan Confidence survey narrows for the second month, with the index slipping to 98.3 from 98.6 in October, and signs of waning household sentiment may push the Federal Reserve to soften the hawkish outlook for monetary policy as it dampens the outlook for private-sector consumption, one of the biggest drivers of growth.

Nevertheless, key data prints on tap for the week ahead should keep the Federal Open Market Committee (FOMC) on track to implement higher borrowing-costs as the U.S. Consumer Price Index (CPI) is expected to climb to 2.5% from 2.2% per annum in September, while Retail Sales are projected to increase 0.6% in October after rising a marginal 0.1% the month prior.

Image of fed fund futures

Greater consumption along with signs of heightening price pressures should keep USD/JPY afloat as Fed Fund Futures continue to highlight expectations for a 25bp rate-hike in December, and it seems as though the FOMC will respond to the shift in U.S. trade policy by implement above-neutral interest rates as the unexpected uptick in the Produce Price Index (PPI) warns of rising input costs.

In turn, the diverging paths for monetary policy casts a long-term bullish outlook for USD/JPY especially as the Bank of Japan (BoJ) remains reluctant to move away from its Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control, but the recent pickup in volatility appears to be spurring a shift in retail interest as traders sell into the recent advance in the exchange rate.

Image of IG client sentiment for usdjpy rate

The IG Client Sentiment Report shows 42.0% of traders are now net-long USD/JPY versus 52.1% last week, with the ratio of traders short to long at 1.38 to 1.The number of traders net-long is 2.0% higher than yesterday and 11.0% lower from last week, while the number of traders net-short is 17.0% higher than yesterday and 13.4% higher from last week.

The flip in retail interest suggests traders are attempting to fade the recent advance in USD/JPY, and a further accumulation in net-short interest may provide a more meaningful contrarian view to crowd sentiment as similar themes materialized in September. With that said, the broader outlook for dollar-yen remains constructive as both price and the Relative Strength Index (RSI) track the upward trends from this year, but the lack of momentum to extend the series of higher highs & lows from earlier this week raises the risk for a short-term pullback. 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 advance from the October-low (111.38) appears to have stalled ahead of the 2018-high (114.55), with the failed attempt to trade back above the Fibonacci overlap around 113.80 (23.6% expansion) to 114.30 (23.6% retracement) raising the risk for a larger pullback.
  • USD/JPY may continue to test trendline support as the Fibonacci overlap around 112.40 (61.8% retracement) to 113.00 (38.2% expansion) comes back on the radar, with the next downside region of interest coming in around 111.10 (61.8% expansion) to 111.80 (23.6% expansion).

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

Additional Trading Resources

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.