USDJPY Forecast: Sentiment Mimics Conditions Prior to 2019 Flash-Crash

Japanese Yen Rate Talking Points

USD/JPY attempts the retrace the sharp decline following the Federal Reserve meeting, with the pickup in volatility spurring a more material shift in FX sentiment, but recent price action raises the risk for a further decline in the dollar-yen exchange rate as it extends the series of lower highs & lows from the previous week.

USDJPY Forecast: Sentiment Mimics Conditions Prior to 2019 Flash-Crash

USD/JPY bounces back from a fresh monthly-low (109.71) as Chicago Fed President Charles Evans, a 2019-voting member on the Federal Open Market Committee (FOMC), talks down the risk for a recession and argues that the U.S. economy is merely ‘decelerating from stronger growth’ in 2018.

Like most of his colleagues, Mr. Evans largely endorsed a wait-and-see approach for monetary policy as ‘the risks from the downside scenarios loom larger than those from the upside ones,’ but went onto say that monetary policy could ‘perhaps even loosened -- to provide the appropriate accommodation to obtain our objectives.’ Nevertheless, the 2019-FOMC voting member still anticipates ‘for almost 2 percent growth this year,’ and it remains to be seen if the FOMC will continue to change its tune over the coming months as the central bank prepares to wind down the $50B/month in quantitative tightening (QT) starting in May.

The comments could also infer that the FOMC has yet to abandon the hiking-cycle as Fed officials pledge to be ‘data dependent’ and forecast a longer-run interest rate of 2.50% to 2.75%, but market participants appear to be looking for a change in regime as Fed Fund Futures now reflect a greater than 60% probability for a rate-cut in December. With that said, the ongoing shift in the Fed’s forward-guidance may keep the dollar-yen exchange rate under pressure amid growing speculation for lower interest rates, but the recent pickup in USD/JPY volatility continues to shake up market participation as retail interest recovers from an extreme reading.

The IG Client Sentiment Report shows 56.1%of traders are now net-long USD/JPY compared to 52.4% at the end of last week, with the ratio of traders long to short at 1.28 to 1.The number of traders net-long is 2.8% higher than yesterday and 13.9% higher from last week, while the number of traders net-short is 19.6% higher than yesterday and 13.3% lower from last week.

Keep in mind, traders were net-short since February 27, with the ratio slipping to an extreme reading earlier this month, but the IG Client Sentiment index has recovered since then amid the ongoing pickup in net-long interest. Moreover, the last time the sentiment index showed a similar dynamic was back in December, with the retail crowd turning heavily net-long ahead of the currency market flash-crash in January.

The flip in retail interest warns of a broader shift in USD/JPY behavior, with recent price action raising the risk for a further decline in the exchange rate as both price and the Relative Strength Index (RSI) snap the bullish trends from earlier this year. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

USD/JPY Rate Daily Chart

• The USD/JPY correction following the currency market flash-crash appears to be unraveling as price and the RSI snap the bullish trends from earlier this year, with recent price action raises the risk for a further depreciation in the exchange rate as it extends the series of lower highs & lows from the previous week.
• Still waiting for a break/close below the Fibonacci overlap around 109.40 (50% retracement) to 110.00 (78.6% expansion) to open up the February-low (108.72), which sits just above the next downside hurdle around 108.30 (61.8% retracement) to 108.40 (100% expansion), with the next area of interest coming in around 106.70 (38.2% retracement) to 107.20 (61.8% retracement).

For more in-depth analysis, check out the Q1 2019 Forecast for the Japanese Yen

Additional Trading Resources

Are you looking to improve your trading approach? Review the ‘Traits of a Successful Trader’ series on how to effectively use leverage along with other best practices that any trader can follow.

Want to know what other currency pairs the DailyFX team is watching? Download and review the Top Trading Opportunities for 2019.

--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.