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Japanese Yen Capitulates, USD/JPY Soars, Significant GBP/JPY Bullish Break

Japanese Yen Capitulates, USD/JPY Soars, Significant GBP/JPY Bullish Break

Justin McQueen,
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Japanese Yen Analysis & News

Japanese Yen Capitulates, USD/JPY Nearing 2018 Peak

The main focus in the FX space has been the Japanese Yen which continues to go up in smoke across the board. The sell-off has been relentless and judging by our in-house sentiment report (Figure 1), clients have been attempting to fade the surge in cross-JPY. Interestingly, despite the slip in the US Dollar and US treasury yields, in which the latter has been a big factor behind to softer Yen, USD/JPY is above 114.00 and not far off the 2018 highs (114.50).

Figure 1. Largest Concentration of Net Shorts in GBP/JPY and USD/JPY

Source: DailyFX, IG

That being said, as oil prices continue to edge higher with Brent crude futures recently breaking above $85/bbl to hit 3yr highs, oil-importing currencies such as the Japan Yen will continue to remain weak. Therefore, looking to fade Yen weakness is the equivalent of standing in front of the proverbial freight train. Meanwhile, momentum indicators such as the RSI showing that Yen crosses are in overbought territory, although, this is by no means at extreme levels and thus doesn’t indicate that a reversal is imminent. Additionally, 20D FX momentum also suggests that price action is not yet extreme (Figure 2). However, I will be keeping a close eye for a pullback in oil and yields for a sign of a short-term top, alongside a dip in risk appetite.

Figure 2. Japanese Yen Selling Not Yet Extreme

Source: Refinitiv

As I mentioned above, I will be keeping a close eye on US yields, in particular the benchmark 10yr, and while this has pulled back from its recent peak, USD/JPY has so far paid little attention. This alone does not imply JPY weakness cannot continue, but perhaps it may be a factor that suggests momentum may well wane.

USD/JPY vs US 10yr Yield

Source: Refinitiv

GBP/JPY Breaks Multi-Decade Trendline

In light of the persistent JPY selling, GBP/JPY has now broken through its multi-decade trendline, stemming from the 2007 peak, potentially meaning significant topside implications for the cross. To add to this, there is little in the way of notable resistance until the Brexit referendum peak at 160.10.

Source: Refinitiv

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