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Japanese Yen Talking Points

USD/JPY extends the advance following the 304K expansion in U.S. Non-Farm Payrolls (NFP), with the exchange rate trading to fresh 2019-highs, and recent price action raises the risk for a larger recovery as dollar-yen carves a fresh series of higher highs & lows.

Image of daily change for major currencies

USD/JPY Carves Bullish Series, RSI Breaks Out Following Upbeat NFP

Image of daily change for usdjpy rate

It seems as though the stronger-than-expected NFP print has heightened the appeal of the U.S. dollar as it put pressure on the Federal Reserve to further embark on its hiking-cycle, and the central bank may find it difficult to defend a wait-and-see approach as the economy shows little to no signs of an imminent recession.

Image of fed fund futures

In turn, market participants are likely to pay increased attention to the townhall with Chairman Jerome Powell as the central bank head warns that ‘the case for raising rates has weakened somewhat,’ and Fed Fund Futures may continue to show the Federal Open Market Committee (FOMC) on hold throughout the first-half of 2019 as the bank drops the hawkish forward-guidance for monetary policy. At the same time, it remains to be seen if the FOMC will adjust the $50B/month in quantitative tightening (QT) as Fed officials show a greater willingness to float a larger-than-expected balance sheet, and another batch of dovish comments may produce headwinds for the greenback as Chairman Powell & Co. tame bets for higher interest rates.

Nevertheless, the reaction to the NFP report raises the risk for a larger recovery as USD/JPY climbs to fresh yearly highs, but the currency market flash crash appears to have shaken up retail sentiment amid the ongoing accumulation in net-short interest.

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The IG Client Sentiment Report shows 48.1% of traders are now net-long USD/JPY compared to 50.9% last week, with the ratio of traders short to long at 1.08 to 1. Keep in mind, traders were net-longUSD/JPY even after the currency market flash-crash, with recent updates showing the number of traders net-long 2.6% higher than yesterday and 5.2% lower from last week However, the number of traders net-short is 14.2% higher than yesterday and 7.0% higher from last week, with net-short interest at the highest reading since late-2018.

With that said, the fresh trend in USD/JPY may generate a further tilt in retail sentiment as traders boost their net-short exposure, and the shift may provide a contrarian view to crowd sentiment as the exchange rate climbs to fresh yearly highs, while the Relative Strength Index (RSI) finally breaks out of the bearish trend from late-2018. 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 finally clears the 109.40 (50% retracement) to 110.00 (78.6% expansion) region after managing to hold above the 108.30 (61.8% retracement) to 108.40 (100% expansion) area, but need a close above the stated region to bring the 111.10 (61.8% expansion) to 111.80 (23.6% expansion) area on the radar.
  • Recent developments in the RSI instill a constructive outlook for USD/JPY as the oscillator breaks out of a bearish trend, with the next region of interest coming in around 112.40 (61.8% retracement) to 113.00 (23.6% expansion).

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.