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USD/JPY Rate Forecast Talking Points:

  • USD/JPY Price Forecast: JPY weakness may accelerate on break > 100-DMA at 109.01
  • Options premium shows waning premium to protect against JPY strength lifting USDJPY
  • USD/JPY Rate Insight from IG UK: changes in retail sentiment favors price declines

On Tuesday, April 24, the US Treasury 10-Year note yield topped 3% for the first time since January 8, 2014. As the yield on the note began to break higher thanks to a confluence of rising commodity prices and declining risk premium, eyes rightfully turned to USD/JPY that appeared artificially low.

Now, looking to other factors, the upside for USD/JPY may still likely be in the works. While you can say the US Dollar is stretched in the short-term per short-term momentum readings, traders would also do well to recognize the aggressive institutional short-US Dollar positions that would need to unwind if the USD strengthens further. Should an unwind happen on the USD short trade, which could happen fast, USD/JPY looks to be a favorable place to see the unwind play out in FX.

Options Premium Shows Further Support For USDJPY Upside (Orange Line)

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Data source: Bloomberg

See what we see when looking at the Japanese Yen. Check out our new Q2 Yen Forecast here.

The chart above shows the premium being paid to protect against JPY strength on the US Dollar via the options market. The market is called risk reversals and it helps you see where ‘insurance’ is being bid up to protect against a sharp move and the JPY is a common currency to gauge sentiment with via Risk Reversals over one-month.

Looking above, you can see the last time that traders were paying so little to protect against JPY strength was back in early January when USD/JPY was trading ~300 pips higher near 112. While this is not a full valuation model arguing that you should be long USD/JPY, you can see that the backdrop that favors further JPY strength continues to dissipate.

USD/JPY Rate Trades Above 100-DMA into Ichimoku Cloud

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Chart Source: Pro Real Time, an IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT

JPY weakness continues as the JPY has been sold off likely due to institutions frantically closing their YTD near-record short exposure on the pair via long JPY futures. On Tuesday, the price breached the 100-DMA at 109.02 and now faces the top of the Ichimoku cloud at 109.32. Given the positive backdrop for Bulls, traders are likely favoring a move to 110.

For traders who appreciate the Ichimoku cloud (click here for a free guide if you’d like to learn more), you’ll notice above that the recent trend of JPY strength that saw USD/JPY fall by over 7% appears to be eroding and giving way to a new uptrend.

Earlier, we shared the bullish options skew that favored a move higher. Another key driver that traders should be on the watch for with USD/JPY is a break of the lagging line on Ichimoku above the cloud. While there may be some volatility in the passage of that development (assuming it develops in the first place) as JPY option volumes on Monday were running 2.5X their 5-day average with strikes in the 110-112 range per Bloomberg, traders should keep their eye on the prize. Bullish targets beyond 110 favor an eventual move toward the 61.8% retracement point of the November to February range at that sits near 110.85 with stop losses focused around the recent pull-back low near 107.

A pull-back appears likely given that RSI(3) has USDJPY as one of the most stretched moves in the short-term, but a pull-back is likely to be viewed as an opportunity to buy the dip if the larger forces remain in play.

USD/JPY Insight from IG UK Client Positioning

USD/JPY Rate Forecast:  Looking Free To Rally As Pair Tests Ichimoku

Source: IG CLIENT SENTIMENT, data provided by IG

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

---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

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