USD/JPY Rate Approaches Yearly High Ahead of NFP Report

Japanese Yen Talking Points

USD/JPY pulls back from a fresh monthly high (139.08) to largely mirror the recent weakness in US Treasury yields, but data prints coming out of the US may keep the exchange rate afloat as the Non-Farm Payrolls (NFP) report is expected to show a further improvement in the labor market.

USD/JPY Rate Approaches Yearly High Ahead of NFP Report

The recent rally in USD/JPY appears to be stalling ahead of the yearly high (139.39) as it struggles to extend the series of higher highs and lows from earlier this week, with the Relative Strength Index (RSI) reflecting a similar dynamic as it appears to be reversing course ahead of overbought territory.

Nevertheless, the NFP report may generate a bullish reaction in USD/JPY as the update is anticipated to show the US economy adding 300K in August, and a positive development may push the Federal Reserve to retain its current approach in combating inflation as Chairman Jerome Powell warns that “restoring price stability will likely require maintaining a restrictive policy stance for some time.”

As a result, a positive development may generate a bullish reaction in the US Dollar as it fuels speculation for another 75bp Fed rate hike, and the exchange rate may continue to track the positive slope in the 50-Day SMA (135.91) as the Bank of Japan (BoJ) remains reluctant to move away from its easing cycle.

In turn, USD/JPY may stage further attempts to test the yearly high (139.39) as it holds above the moving average, while the tilt in retail sentiment looks poised to persist as traders have been net-short the pair for most of 2022.

The IG Client Sentiment report shows 24.40% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 3.10 to 1.

The number of traders net-long is 1.97% lower than yesterday and 4.18% lower from last week, while the number of traders net-short is 3.53% higher than yesterday and 6.95% higher from last week. The decline in net-long position comes as USD/JPY pulls back from a fresh monthly high (139.08), while the rise in net-short interest has fueled the crowding behavior as 30.42% of traders were net-long the pair last week.

With that said, USD/JPY may consolidate ahead of the NFP report as it struggles to extend the series of higher highs and lows from earlier this week, but the exchange rate may stage further attempts to test the yearly high (139.39) as it appears to be tracking the positive slope in the 50-Day SMA (135.91).

USD/JPY Rate Daily Chart

Source: Trading View

• USD/JPY trades a fresh monthly high (139.08) after pushing back above the 50-Day SMA (135.91), and the exchange rate may attempt to test the yearly high (139.39) as it appears to be tracking the positive slope in the moving average.
• The next of interest comes in around the September 1998 high (139.91), with a break/close above the 140.30 (78.6% expansion) region bringing the 141.70 (161.8% expansion) area on the radar.
• However, lack of momentum to extend the series of higher highs and lows from earlier this week may lead to a near-term pullback in USD/JPY, with a move below the 137.40 (61.8% expansion) to 137.80 (361.8% expansion) region raising the scope for a move towards the 135.30 (50% expansion) area.

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong