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Japanese Yen Talking Points

USD/JPY extends the decline from the previous week as Federal Reserve officials express mixed views towards the U.S. economy, and recent price action keeps the downside targets of the radar as the exchange rate extends the series of lower highs & lows from the previous week.

Image of daily change for major currencies

USD/JPY Rate Remains Under Pressure as Fed Endorses Gradual Approach

Image of daily change for usdjpy rate

USD/JPY continues to chip away at the advance from the October-low (111.38) even as New York Fed President John Williams, a permanent voting-member on the Federal Open Market Committee (FOMC), argues that monetary policy is ‘not on a preset course,’ but it seems as though the central bank will stick to a gradual approach in normalizing monetary as the ‘goal here is to keep the economy strong, keep this expansion going as long as possible.’

Image of fed fund futures

Even though the FOMC is widely expected to deliver a 25bp rate-hike in December, there appears to be limited views on extending the hiking-cycle as Vice-Chairman Richard Clarida tames bets for above-neutral interest rates. The comments suggest the FOMC is in no rush to alter the forward-guidance for monetary policy amid the uncertainty surrounding the world economy, and Chairman Jerome Powell & Co. may continue to project a longer-run interest rate around 2.75% to 3.00% at the next quarterly meeting in December as ‘profit growth and estimates of profit growth are slowing.’

With that said, the deviating paths for monetary policy still casts a long-term bullish outlook for USD/JPY especially as the Bank of Japan (BoJ) is in no rush to move away from its Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control, but the exchange rate may stage a larger correction ahead of the Group of 20 (G20) Summit on tap for the end of the month as the recent pullback appears to be shifting retail interest.

Image of IG Client Sentiment for usdjpy rate

The IG Client Sentiment Report shows 44.1% of traders are still net-long USD/JPY compared to 40.2% at the end of the previous week, with the ratio of traders short to long at 1.27 to 1. Keep in mind, traders have remained net-short since November 2 when USD/JPY traded near 113.20 even though price has moved 0.2% lower since then. Moreover, even though the majority (net-shorts) stands to benefit from a further decline in the exchange, the number of traders net-long is 9.4% higher than yesterday and 8.9% higher from last week, while the number of traders net-short is 7.3% higher than yesterday and 14.6% lower from last week.

A further accumulation in net-long position may ultimately generate a shift in the IG Client Sentiment index, which may mimic the developments from earlier October as the gauge for retail sentiment bounced back from extremes, and recent price action keeps USD/JPY vulnerable to a larger pullback as the exchange rate continues to carve a string of lower highs & lows. 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
  • USD/JPY may stage a larger correction following the failed attempt to test the October-high (114.55), with the near-term outlook capped by the 113.80 (23.6% expansion) to 114.30 (23.6% retracement) region.
  • A close below the Fibonacci overlap around 112.40 (61.8% retracement) to 113.00 (38.2% expansion) raising the risk for a move towards 111.10 (61.8% expansion) to 111.80 (23.6% expansion), with the next downside area of interest coming in around 109.40 (50% retracement) to 110.00 (78.6% expansion).
  • Keeping a close eye on the Relative Strength Index (RSI) as it comes up against trendline support, with failure to retain the bullish formation raising the risk for a further decline in the exchange rate.

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

Image of DailyFX economic calendar

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.