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USD/JPY Rate Forecast Talking Points:

  • USD/JPY Price Forecast: Looking for pullbacks to provide an opportunity to join the trend
  • 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

As Japanese financial markets get ready to close for Golden Week, the broader focus remains on the FOMC meeting and whether or not the USD/JPY train will slow down now that 110 has been surpassed.

By the look of what’s happening in short-term option ratios, known as risk reversals, there remains an increasing lack of traders willing to pay a premium for outsized JPY gains. Also, looking to the rest of the majors with the British Pound and Euro also selling, the US Dollar could continue its gains, which have been best expressed against the Japanese Yen and Swiss Franc since late March.

Options Traders Shy Away From Paying for JPY Strength

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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.

Now, looking to other factors, the upside for USD/JPY may still be in play. 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.

JPY Longs May Unwind And Take USDJPY Higher

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Data source: Bloomberg

The chart above shows the net long JPY futures positions held by Hedge Funds or Leveraged Funds per data aggregated from the CFTC that was released last Friday. The data was from the close of trading on April 24. The key takeaway is the JPY longs recently held their largest net-long position, a bet on USD/JPY downside in the last 52-weeks. A further unwind of these large players alongside the favorable USD backdrop could help propel USD/JPY closer to the YTD high of 113.39 on January 8.

USD/JPY Rate Trades Above 110 For First Time Since Feb. 5

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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 and technical barriers have been broken. The move above 110 toward the February 5 high at 110.29 does look stretched, but the structure of a bull market extension are present.

Of course, retracements in a trend happen, but if the theme backing the trade remains and options markets, as well as other correlated indicators, favor further upside, it remains unwise to fight a strong trend.

Key support for the trend sits at the April 30 low at 109.02 and the 100-DMA at 108.79. Those would be attractive places to join the uptrend with minimal risk given the pull-back.

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.

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.

USD/JPY Insight from IG UK Client Positioning – Drop in Net Long Positions

USD/JPY Rate Forecast:  Above 110 May Paint Picture Of Things To Come

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. 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 USDJPY trading bias.

---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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