USD/JPY ANALYSIS
- Yen continues to hurt after poor GDP print.
- U.S./China tensions subside after Presidential meeting.
- BOJ commitment to growth and inflation target may hurt JPY.
- Potential breakout pending on bull flag pattern.
- Mixed IG Client Sentiment (IGCS).
JAPANESE YENFUNDAMENTAL BACKDROP
The Japanese Yen has been depreciating against the U.S. dollar this week beginning with a poor growth data – see calendar below. In addition, the safe haven appeal of the Yen was withdrawn for the time being after President Biden and Chinese Leader Xi Jinping somewhat decreased any tension between the two nations.
Later this week markets are looking forward to Japanese inflation data which remains well below the Bank of Japan (BOJ’s) 2% target rate; which remains close to 0%. The BOJ has reiterated this pledge along with maintaining the accommodative environment to support economic growth which should lead to further Yen weakness.
JPY ECONOMIC CALENDAR
Source: DailyFX economic calendar
The graphic below illustrates the currency weakness of the Japanese Yen year-to-date, being the weakest of the major currencies against the greenback. U.S. 10-year Treasury yields (USD/JPY is the highest positively correlated G10 pair to 10-year U.S. Treasury yields) are rising as inflationary pressure increases which could lead to a sooner than expected taper completion as well as rate hikes being brought forward.
Source: Reuters
USD/JPY TECHNICAL ANALYSIS
USD/JPY Daily Chart:
Chart prepared by Warren Venketas, IG
The daily USD/JPY chart above has been consolidating since mid-October, forming a bull flag chart pattern (blue). Fundamentally, the USD look primed to continue its pre-flag rally which could see a breakout above flag resistance. The Relative Strength Index (RSI) remains above the 50 level, supportive of upside momentum.
Key resistance levels:
- 115.60 – 61.8% Fibonacci level
- 115.00
Key support levels:
- 114.00
- 112.42 – 50% Fibonacci level
IG CLIENT SENTIMENT POINTS TO SHORT-TERM UNCERTAINTY
| Change in | Longs | Shorts | OI |
| Daily | -2% | 2% | 0% |
| Weekly | 12% | -16% | -6% |
IGCS shows retail traders are currently net short on USD/JPY, with 69% of traders currently holding short positions (as of this writing). At DailyFX we take a contrarian view on sentiment which suggests further upside on the pair however, the net change (daily) in long positions outweigh shorts which result in a mixed disposition.
Trade Smarter - Sign up for the DailyFX Newsletter
Receive timely and compelling market commentary from the DailyFX team
Contact and follow Warren on Twitter: @WVenketas
