Forex trading crowds have aggressively bought into recent US Dollar (ticker: USDOLLAR) declines against the Japanese Yen, and the sharp swing in sentiment warns that the pair could continue its short-term declines. We recently wrote that the USD likely set a significant bottom versus the JPY on clearly one-sided sentiment, but its more recent tumbles gives us pause in the timing of USDJPY strength.
Critical USDJPY support at ¥77.96 will likely be the “line in the sand” that determines our shorter-term trading bias, but yesterday’s nosedive on the US Federal Reserve’s strong hints at fresh Quantitative Easing measures (QE3) may stack the odds in favor of further breakdowns.
Indeed, the key US 10-Year Treasury Yield fell sharply off of its 200-day SMA on the Fed announcement. The correlation between the Yen and Treasury yields trades near record strength, and sharp moves in the 10-year bode poorly for the yield-sensitive USDJPY.
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--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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