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Prior Session Recap – US Dollar Gains and Sentiment Deteriorates

Tuesday’s trading session could have been characterized by two main themes. The first is broad US Dollar strength. The greenback was one of the best performing majors, rising alongside a push higher in local government bond yields as Fed rate hike expectations firmed. Upward revisions in US retail sales seemed to have helped this dynamic. But there seemed to have been another force that may have given the greenback a boost.

A second well-performing FX major was the anti-risk Swiss Franc. It appreciated as the S&P 500 declined about 0.68%, putting in its worst fall in just about two weeks. Meanwhile, sentiment-sensitive currencies like the Australian and New Zealand Dollars depreciated. The US Dollar can at times benefit when risk trends decline across the board given its highly liquid status, and they sure did.

On this front, the two largest world economies are amidst settling trade disputes with both sides having their issues. Ahead of China’s Vice Premier Liu He visiting the country to negotiate, US Ambassador to China Terry Branstad said that the two countries are still “very far apart”. Meanwhile, Chinese fixed asset investment slowed to its lowest since 1999. On the whole, most Asian benchmark indexes also finished the day in the red.

In addition, there is more uncertainty in the markets as they await an Italian majority government outcome that combines the two anti-establishment parties. By the end of Tuesday’s session, Five Star Movement leader Luigi Di Maio said that a deal may be sealed on the next day as he still has some issues to resolve with Matteo Salvini.

A Look Ahead – Yen Could Benefit if Asian Shares Echo Wall Street Declines

With a deterioration in sentiment, the anti-risk Japanese Yen could benefit if Asian shares echo the declines seen on Wall Street. Meanwhile, the currency may not get much support from local GDP figures. Data out of Japan has been tending to outperform relative to economists’ expectations. Even if we get more of the same in the data, it will most likely have limited implications for Bank of Japan monetary policy expectations.

DailyFX Economic Calendar: Asia Pacific (all times in GMT)

Asia AM Digest: Yen May Gain if Sentiment Falls. Not on GDP Beat

DailyFX Webinar CalendarCLICK HERE to register (all times in GMT)

Asia AM Digest: Yen May Gain if Sentiment Falls. Not on GDP Beat

IG Client Sentiment Index Chart of the Day: USD/JPY

Asia AM Digest: Yen May Gain if Sentiment Falls. Not on GDP Beat

CLICK HERE to learn more about the IG Client Sentiment Index

Retail trader data shows 52.3% of USD/JPY traders are net-long with the ratio of traders long to short at 1.1 to 1. In fact, traders have remained net-long since Dec 29 when USD/JPY traded near 112.467; price has moved 1.9% lower since then. The number of traders net-long is 8.1% lower than yesterday and 6.2% lower from last week, while the number of traders net-short is 3.8% higher than yesterday and 0.5% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/JPY prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current USD/JPY price trend may soon reverse higher despite the fact traders remain net-long.

Asia AM Digest: Yen May Gain if Sentiment Falls. Not on GDP BeatAsia AM Digest: Yen May Gain if Sentiment Falls. Not on GDP BeatAsia AM Digest: Yen May Gain if Sentiment Falls. Not on GDP BeatAsia AM Digest: Yen May Gain if Sentiment Falls. Not on GDP Beat

Five Things Traders are Reading:

  1. Gold Price Drops as US Treasury Yields Push Higher by Christopher Vecchio, Sr. Currency Strategist
  2. Stagnant Australia Wage Price Index (WPI) to Fuel AUD/USD Weakness by David Song, Currency Analyst
  3. US Dollar Index (DXY) Forecast: Recent Strength A Long-Term Reversion?by Tyler Yell, Forex Trading Instructor
  4. GBP/USD Range Snaps, RSI Remains Extreme Ahead of BoE, FOMC Rhetoric by David Song, Currency Analyst
  5. USD/JPY Rate Forecast: US Yields Pave the Way for Move Above 110by Tyler Yell, Forex Trading Instructor

--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter