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USD/JPY Rate Weakness Spurs Shift in Retail FX Interest

USD/JPY Rate Weakness Spurs Shift in Retail FX Interest

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Japanese Yen Talking Points

USD/JPY may face a more bearish fate over the remainder of the month amid the failed attempt to test the 2018-high (114.55), and recent developments keep thedownside targets of the radar as the weakness in the exchange rate appears to be spurring a shift in retail interest.

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USD/JPY Rate Weakness Spurs Shift in Retail FX Interest

Image of daily change for usdjpy

USD/JPY may continue to chip away at the advance from the October-low (111.38) as it snaps the monthly opening range, but the retail crowd appears to be fading the weakness in the exchange rate as sentiment bounces back from an extreme reading.

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The IG Client Sentiment Report shows 43.8% of traders are net-long USD/JPY compared to 40.2% last week, with the ratio of traders short to long at 1.28 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% higher since then. The major U.S. holiday has a tendency to produce thin market conditions especially going into the final days of November, but current updates show the number of traders net-long is unchanged from yesterday and 24.2% higher from last week, while the number of traders net-short is 11.0% higher than yesterday and 13.4% lower from last week.

A pickup in volatility raises the risk for a material adjustment in retail interest, with a further accumulation in net-long position likely to spur a shift in the IG Client Sentiment index, which may mimic the developments from early October as the gauge bounces back from a similar reading.

Looking ahead, Fed Vice-Chairman Richard Clarida and Chairman Jerome Powell are both scheduled to speak ahead of the FOMC Minutes due out on November 29, and it seems as though the central bank will continue to prepare U.S. households and businesses for higher borrowing costs as the committee fulfils its dual mandate for full-employment and price stability.

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However, limited views on extending the hiking-cycle may keep USD/JPY under pressure as the majority of the FOMC promote a gradual approach in normalizing monetary policy, and Chairman Powell & Co. may continue to project a longer-run interest rate around 2.75% to 3.00% at the next meeting in December as ‘risks to the economic outlook appear roughly balanced.’

With that said, the deviating paths for monetary policy instills a long-term bullish outlook for USD/JPY especially as the Bank of Japan (BoJ) sticks to the Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control, but dollar-yen may stage a larger correction ahead of the Group of 20 (G20) Summit on tap for the end of the month as it snaps the monthly opening range, with the pullback from the weekly-high (113.21) generating a fresh series 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

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  • USD/JPY remains at risk for 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.
  • Still waiting for a close below the Fibonacci overlap around 112.40 (61.8% retracement) to 113.00 (38.2% expansion) to open up the 111.10 (61.8% expansion) to 111.80 (23.6% expansion) region, with the next downside area of interest coming in around 109.40 (50% retracement) to 110.00 (78.6% expansion).
  • Still keeping a close eye on the Relative Strength Index (RSI) as it moves back towards 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

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.