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Weekly Japanese Yen Technical Forecast: Minor Setback amid Strength Otherwise

Weekly Japanese Yen Technical Forecast: Minor Setback amid Strength Otherwise

2020-05-10 21:00:00
Christopher Vecchio, CFA, Senior Strategist
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Weekly Japanese Yen Technical Forecast: Minor Setback amid Strength Otherwise

Technical Forecast for the Japanese Yen: Neutral

  • The Japanese Yen has been one of the better performing currencies since the start of 2020, largely due to the safe haven demand offered by the highly liquid currency during the coronavirus pandemic.
  • Resiliency by the Japanese Yen in pairs like EUR/JPY, GBP/JPY, and USD/JPY bode well for the future – despite near-term reversals.
  • The IG Client Sentiment Index suggests that retail traders moderating their Yen positioning.
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Yen’s Safe Haven Appeal Remains Stable

The Japanese Yen has been one of the better performing currencies since the start of 2020, largely due to the safe haven demand offered by the highly liquid currency during the coronavirus pandemic. But gains the past few weeks have been difficult to come by, insofar as the rallies by global equity markets has pushed traders back into the historically higher yielding currencies.

Yet it remains the case that, regardless of near-term reversals by several of the JPY-crosses, resiliency by the Japanese Yen in pairs like EUR/JPY, GBP/JPY, and USD/JPY bode well for the future. The fact of the matter is that of the Japanese Yen has been able to maintain its gains in the current market environment, setting itself up neatly should risk appetite contract once more.

USD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (May2019 to May 2020) (CHART 1)

Weekly Japanese Yen Technical Forecast: Minor Setback amid Strength Otherwise

USD/JPY rates closed out last week on a high note, but not before setting fresh May lows and the lowest level since the second week of March. A lack of movement in gold prices and US Treasury yields has left the Japanese Yen on a slow, bearish burn versus the US Dollar, but hardly in a convincing fashion.

The momentum profile for USD/JPY rates is conflicted. USD/JPY rates are intertwined among the daily 5-, 8-, 13-, and 21-EMA envelope, which is aligned in neither bearish nor bullish sequential order. Daily MACD continues to glide below its signal line, while Slow Stochastics are holding in oversold territory (although edging higher). More losses may still be in the cards.

IG Client Sentiment Index: USD/JPY RATE Forecast (May 8, 2020) (Chart 2)

Weekly Japanese Yen Technical Forecast: Minor Setback amid Strength Otherwise

USD/JPY: Retail trader data shows 55.56% of traders are net-long with the ratio of traders long to short at 1.25 to 1. The number of traders net-long is 0.79% higher than yesterday and 13.10% higher from last week, while the number of traders net-short is 10.00% lower than yesterday and 11.44% higher 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.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/JPY-bearish contrarian trading bias.

EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (May 2019 to May 2020) (CHART 3)

Weekly Japanese Yen Technical Forecast: Minor Setback amid Strength Otherwise

The most recent forecast update remains valid: “After failing at the rising trendline going back to the 2012, 2016, and 2019 swing lows at the start of 2020. EUR/JPY rates have traded below their 2019 lows, breaking out of the symmetrical triangle along the way. The longer-term context of losses dating back to the 2018 suggests that more downside may be imminent in EUR/JPY rates.” EUR/JPY rates set new yearly lows this past week, and their lowest levels since 2017. Daily MACD is trending lower in bearish territory, while Slow Stochastics are nestled in oversold condition. It would seem that all the pieces are in place for a longer-term erosion in EUR/JPY rates.

IG Client Sentiment Index: EUR/JPY Rate Forecast (May 8, 2020) (Chart 4)

Weekly Japanese Yen Technical Forecast: Minor Setback amid Strength Otherwise

EUR/JPY: Retail trader data shows 69.62% of traders are net-long with the ratio of traders long to short at 2.29 to 1. The number of traders net-long is 19.53% lower than yesterday and 72.64% higher from last week, while the number of traders net-short is 13.57% lower than yesterday and 11.51% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/JPY prices may continue to fall.

Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/JPY trading bias.

GBP/JPY Technical Analysis: Daily Rate Chart (May 2019 to May 2020) (Chart 5)

Weekly Japanese Yen Technical Forecast: Minor Setback amid Strength Otherwise

GBP/JPY rates have struggled to regain their bullish momentum off the March lows, dipping to fresh monthly lows in the process. Momentum remains weak even as GBP/JPY rates are enmeshed in their daily5, 8-, 13-, and 21-EMA envelope, which was previously in bearish sequential order. Daily MACD is trending lower just below its signal line, while Slow Stochastics are holding in oversold territory for now. A break above the April highs and through 136.00 is necessary before bulls can have any reasonable confidence.

IG Client Sentiment Index: GBP/JPY Rate Forecast (May 8, 2020) (Chart 6)

Weekly Japanese Yen Technical Forecast: Minor Setback amid Strength Otherwise

GBP/JPY: Retail trader data shows 56.56% of traders are net-long with the ratio of traders long to short at 1.30 to 1. The number of traders net-long is 2.45% lower than yesterday and 20.83% higher from last week, while the number of traders net-short is 15.81% lower than yesterday and 23.74% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/JPY prices may continue to fall.

Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed GBP/JPY trading bias.

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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