Japanese Yen Talking Points
USD/JPY looks poised for a larger rebound following the currency market flash crash as the exchange rate carves a series of higher highs & lows, while the Relative Strength Index (RSI) bounces back from oversold territory.
USD/JPY Rate Risks Larger Flash-Crash Correction on RSI Signal
USD/JPY may continue to catch a bid ahead of the Federal Open Market Committee (FOMC) Minutes as U.S. President Donald Trump tweets that ‘talks with China are going very well,’ and the mild improvement in risk sentiment may keep the dollar-yen exchange rate afloat as U.S. Treasury yields highlight a similar dynamic.
Efforts to avoid a U.S.-China trade war should continue to shore up investor confidence especially as the People’s Bank of China (PBoC) appears to be on track to reduce the Reserve Requirement Ratio (RRR) ahead of the lunar New Year, and the FOMC Minutes may do little to influence the near-term outlook for USD/JPY as the central bank shows a greater willingness to adopt a wait-and-see approach in 2019.
As a result, Fed Fund Futures may continue to show the FOMC on hold throughout the first-half of the year, but the ongoing adjustment in the Fed’s balance sheet offers a bullish argument for USD/JPY as the Bank of Japan (BoJ) remains in no rush to move away from the Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control.
With that said, the Fed’s quantitative tightening (QT) may provide USD/JPY with a fundamental floor even though the narrowing balance sheet drags on risk-taking behavior, but the flash crash appears to be shaking up retail interest as traders fade the sharp rebound in the exchange rate.
The IG Client Sentiment Report shows 60.2% of traders are now net-long USD/JPY compared to 64.6% last week, with the ratio of traders long to short at 1.51 to 1.The number of traders net-long is 1.8% lower than yesterday and 10.3% lower from last week, while the number of traders net-short is 5.7% lower than yesterday and 23.3% higher from last week.
The ongoing tilt in retail sentiment provides a contrarian view to crowd sentiment even though net-long interest suffers following the USD/JPY flash crash, and current market conditions may foster a more bearish fate for the dollar-yen exchange rate as both price and the Relative Strength Index (RSI) snap the bullish trends from the previous year. However, the jump in net-short position may foreshadow a broader shift in market behavior as traders fade the recent recovery in USD/JPY, and the recent series of higher highs & lows may generate a larger rebound in the exchange rate, with the RSI flashing a textbook buy-signal as it crosses back above 30. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.
USD/JPY Daily Chart
- Keep in mind, the broader outlook for USD/JPY remains tilted to the downside, but the exchange rate may stage a larger rebound following the failed attempt to test the 2018-low (104.63), with the recent series of higher highs & lows bringing the Fibonacci overlap around 109.40 (50% retracement) to 110.00 (78.6% expansion) on the radar.
- Need a close back below the 108.30 (61.8% retracement) to 108.40 (100% expansion) region to bring the downside targets back on the radar, with the first hurdle coming in around 106.70 (38.2% retracement) to 107.20 (61.8% retracement) followed by the 105.40 (50% retracement) area.
For more in-depth analysis, check out the Q1 2019 Forecast for the Japanese Yen
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--- Written by David Song, Currency Analyst
Follow me on Twitter at @DavidJSong.