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USD/JPY Flash-Crash Rebound Fuels Expansion in Retail Short Exposure

USD/JPY Flash-Crash Rebound Fuels Expansion in Retail Short Exposure

David Song,
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Japanese Yen Talking Points

The USD/JPY rebound following the currency market flash-crash may ultimately spur a run at the monthly-high (109.68) as the exchange rate initiates another series of higher highs & lows, but dollar-yen stands at risk of facing range-bound conditions ahead of the next Federal Reserve interest rate decision on January 30 as a growing number of central bank officials drop the hawkish forward-guidance for monetary policy.

Image of daily change for major currencies

USD/JPY Flash-Crash Rebound Fuels Expansion in Retail Short Exposure

Image of daily change for usdjpy rate

USD/JPY extends the advance from earlier this week even though the U.S. government remains partially shutdown, and the stickiness in the exchange rate may persist over the coming days as Treasury yields reflect a similar behavior.

However, the uncertainty surrounding fiscal policy may limit the appeal of the U.S. dollar as it curbs the outlook for growth and inflation, and it seems as though the Federal Open Market Committee (FOMC) will keep the benchmark interest rate on hold throughout the first-quarter of 2019 as an increasing number of Fed officials show a greater willingness to revert back to a wait-and-see approach. In turn, changes in risk sentiment may have a greater influence on USD/JPY in the interim as the FOMC tames bets for an imminent rate-hike, but the flash crash appears to have shaken up retail interest as traders continue to fade the sharp rebound in the exchange rate.

Image of IG client sentiment for usdjpy

The IG Client Sentiment Report shows 55.3% of traders are now net-long USD/JPY compared to 56.9% at the end of last week, with the ratio of traders long to short at 1.24 to 1.1. In fact, traders have been net-long since December 18 when USD/JPY traded near 112.50 even though price has moved 4.0% lower since then.The number of traders net-long is 0.3% lower than yesterday and 8.8% higher from last week, while the number of traders net-short is 6.1% higher than yesterday and 19.3% higher from last week.

Keep in mind, the persistent tilt in retail sentiment provides a contrarian view to crowd sentiment as net-long interest remains little changed following the USD/JPY flash crash, but the ongoing accumulation in net-short position may foreshadow a more material shift in market behavior as traders continue to fade the recovery in the stickiness in the exchange rate.

With that said, the broader outlook remains tilted to the downside as both price and the Relative Strength Index (RSI) snap the bullish trends from the previous year, but recent developments in the momentum indicator warn of a larger correction as the oscillator bounces back from 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
  • Broader outlook for USD/JPY remains tilted to the downside as both price and the RSI snap the bullish trends from 2018, but the failed attempt to test the 2018-low (104.63) may generate range-bound conditions as the oscillator climbs back from oversold territory
  • In turn, the Fibonacci overlap around 109.40 (50% retracement) to 110.00 (78.6% expansion) remains on the radar, but failure to hold above the 108.30 (61.8% retracement) to 108.40 (100% expansion) region raises the risk for a move back towards 106.70 (38.2% retracement) to 107.20 (61.8% retracement), with the next area of interest coming in around 105.40 (50% retracement).

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.

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