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Japanese Yen Takes Center Stage as a Top Trade of 2014

Japanese Yen Takes Center Stage as a Top Trade of 2014

2014-01-07 15:55:00
David Rodriguez, Head of Product
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Summary: The Japanese Yen seems at a potentially critical turning point as it nears significant resistance (USDJPY support). Which way does it break and how might we trade it?

- USDJPY nears a potentially critical turning point at major support

- Our retail forex sentiment data shows a substantial shift in positioning

- The coming weeks may determine whether USDJPY-long remains a top trade of 2014

Japanese Yen at a Potentially Critical Turning Point as USDJPY Near Significant Support

japanese_yen_is_a_top_trade_of_2014_body_Picture_5.png, Japanese Yen Takes Center Stage as a Top Trade of 2014

Source: FXCM Trading Station Desktop, Prepared by David Rodriguez

Our Senior Strategist accurately called for an important USDJPY pullback when it traded near multi-year highs, and now he highlights a potentially pivotal turning point in the Yen. Put simply, forex market sentiment on the Japanese Yen was at extremes and remains very one-sided. Why does that matter?

Yesterday we pointed out why recent USDJPY moves were so significant, and indeed this remains the pair to watch in the days ahead. If we see a break below key price levels we could see a short-term panic and important USDJPY losses (Japanese Yen gains). One of the most important factors remains stock markets; the USDJPY has traded virtually tick-for-tick with the S&P 500.

japanese_yen_is_a_top_trade_of_2014_body_Picture_6.png, Japanese Yen Takes Center Stage as a Top Trade of 2014

One other important consideration is the significant shift we’ve seen in retail forex positioning. A look at our proprietary retail sentiment data shows big shifts in the Japanese Yen—particularly in the EURJPY pair.

Forex Trading Crowds Now at Biggest Long Position Since EURJPY Bottomed Near ¥119.10

japanese_yen_is_a_top_trade_of_2014_body_Picture_7.png, Japanese Yen Takes Center Stage as a Top Trade of 2014

Source: FXCM Trading Station Desktop, Prepared by David Rodriguez

What happens next could define Japanese Yen trends through the foreseeable future. And as a long-term JPY bear and US Dollar bull I argued that a USDJPY long position is my favorite trade of 2014. That remains true, but a substantial correction may in fact give me a better opportunity to get long at a lower price.

It will be critical to watch price action in the coming weeks as it could determine trends throughout the rest of the year. Follow any updates on the Japanese Yen and other currencies via this author’s e-mail distribution list.

Forex Correlations Summary

View forex correlations to the S&P 500, S&P Volatility Index (VIX), Crude Oil Futures prices, US 2-Year Treasury Yields, and Spot Gold prices.

japanese_yen_is_a_top_trade_of_2014_body_Picture_8.png, Japanese Yen Takes Center Stage as a Top Trade of 2014

Data source: Bloomberg. Chart source: R SEE GUIDE ON READING THE ABOVE CHART

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com David specializes in automated trading strategies. Find out more about our automated sentiment-based strategies on DailyFX PLUS.

Contact and follow David via Twitter: https://twitter.com/DRodriguezFX

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

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