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USD/JPY Will Look To Sentiment, Intermarket Highlights for Direction

USD/JPY Will Look To Sentiment, Intermarket Highlights for Direction

Tyler Yell, CMT, Currency Strategist

Key Takeaways:

  • USD/JPY technical strategy: breakout above 200-DMA (112.01), MA now seen as support
  • Last week’s highs near 113.21/26 acting as firm resistance
  • IGCS Highlight: Pickup in long positioning favors resistance on price advance

October kicked off with a strong boost to US fundamental data with the very strong US ISM figure showing the strongest headline reading since summer 2004. The most encouraging component was seen as the “prices paid” component of the report that were at the highest level since 2011, which helps to support the view for higher inflation, higher yields, and if the correlations hold, higher USD/JPY.

In addition to the fundamental picture bringing about higher yields, sentiment seems to be a sticking point. Explained in more detail below, we see a signal favoring a stronger bearish contrarian trading bias on an increase in further net-long than last week.

The final week of trading in Q3 will place current resistance on USD/JPY near 1.13.21/26 and further at the 2017 resistance in the 114/115 zone. Traders should look for price support near the 200-DMA, which aligns with the Ichimoku cloud. However, the lack of a clear trend on the daily chart makes it difficult to expect a breakout that lasts for months on end as JPY-based trend traders seek.

Beyond a holding of the 200-DMA near 112, the clearest signal that we could see a new trend establishing itself would be a further flattening of the US yield curve that would be led by selling off in the front end of the curb in expectations of tighter Fed policy. Volatility is expected around the Japanese election, but currently, nothing that is expected to be trend defining as Abe is expected to hold the majority, albeit with historically poor approval ratings.

Daily USD/JPY Chart: Strong support at 112.20 - Ichimoku + 200-DMA

USD/JPY Will Look To Sentiment, Intermarket Highlights for Direction

Chart Created by Tyler Yell, CMT

USD/JPY Insight from IG Client Positioning: Pickup in long positioning favors resistance on price advance

The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.

USD/JPY Will Look To Sentiment, Intermarket Highlights for Direction

USDJPY: Retail trader data shows 55.2% of traders are net-long with the ratio of traders long to short at 1.23 to 1. In fact, traders have remained net-long since Jul 18 when USDJPY traded near 113.122; price has moved 0.3% lower since then. The number of traders net-long is 8.8% higher than yesterday and 6.9% higher from last week, while the number of traders net-short is 4.6% higher than yesterday and 1.0% lower 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 further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USDJPY-bearish contrarian trading bias (emphasis added.)

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

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