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USD/JPY Extends Higher Into Confluence of Resistance Ahead of BoJ

USD/JPY Extends Higher Into Confluence of Resistance Ahead of BoJ

Tyler Yell, CMT, Currency Strategist

Will Yields Continue To Drive JPY in 2Q? See our forecast to find out what’s driving the biggest market trends!

Talking Points:

  • USD/JPY Technical Strategy: sharp retracement higher, anticipate resistance holding
  • JPY dropped in G8currency ranking, GBP/AUD
  • Weekly USD/JPY rally may stall near 55-DMA at 112.01

USD/JPY has broken higher by nearly 4% from the April 17 low at 108.13. If you look at the chart below, you can see that the price was already extended lower and a rebound was due. Since then, we’ve had a run higher in specific risky assets like equity and an unwind of bearish EUR positions, which has lifted EUR/JPY higher by ~6.3% in the sametimeframe that USD/JPY has moved higher by ~4%.

Thursday will provide the April Bank of Japan meeting, which is expected to leave rates unchanged and use conservative language on expected inflation has given the stubborn JPY and unsteady commodity prices. The driver for USD/JPY in addition to JPY shorts being pulled off after the first round of the French election is the Tax reform plans announced in the US, which has helped lift the yields as the Federal Reserve is in their quiet period.

Another insight you can pull from the chart below is the increasingly high positive correlation between US 2YR Yields and USD/JPY that currently sits at +0.80. While correlation does not lead to causation, it’s worth noting that there may be a ceiling on yields, which could also mean that should the correlation hold, it could be difficult for USD/JPY to breakout higher. The ceiling comes from a Federal Reserve that has a fixed long-run target rate and an admittedly falling R* or neutral rate per the San Francisco Fed.

Therefore, the gains in the USD/JPY may be short-lived or limited past the 55-DMA at 112.01 (not pictured on the chart below.) We would likely need to see a move and close beyond 113 to feel that the downside in USD/JPY has had its time in the sun and that we should anticipate further JPY weakness and USD/JPY upside.

Join Tyler in his Daily Closing Bell webinars at 3 pm ETto discuss market developments.

USD/JPY Extends Higher Into Confluence of Resistance Ahead of BoJ

Chart Created by Tyler Yell, CMT

USD/JPY IG Trader Sentiment: US Dollar Trading Higher versus Yen - Reversal on Hand?

USD/JPY Extends Higher Into Confluence of Resistance Ahead of BoJ

What do retail traders’ buy/sell decisions hint about the JPY trend? Find out here!

USDJPY: As of April 26, retail trader data shows 61.3% of traders are net-long with the ratio of traders long to short at 1.58 to 1. In fact, traders have remained net-long since Jan 09 when USDJPY traded near 117.616; the price has moved 5.1% lower since then. The number of traders net-long is 13.5% lower than yesterday and 34.6% lower from last week, while the number of traders net-short is 6.0% higher than yesterday and 23.7% higher from last week.

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

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Shorter-Term USD/JPY Technical Levels: Wednesday, April26, 2017

For those interested in shorter-term levels of focus than the ones above, these levels signal important potential pivot levels over the next 48-hours.

USD/JPY Extends Higher Into Confluence of Resistance Ahead of BoJ

Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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Contact and discuss markets with Tyler on Twitter: @ForexYell

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

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