Key Takeaways:

• USD/JPY technical strategy: 12-month trendline working to hold up USD/JPY

• USD/JPY trading within price range of 2017 extreme day (109.05-108.13)

• Risk off sentiment has had a difficult time holding, limiting JPY strength

• IGCS Highlight: USD/JPY 75% net-long exposure favors contrarian downside bias

Despite the weak USD, the Japanese Yen has followed suit and remained weak as well. Over the last two weeks, the only currencies that have consistently weakened against the US Dollar as other strengthened were the New Zealand dollar and Japanese yen. While the New Zealand dollar has strengthened this week, the Yen appears the odd man out.

A persistent theme that we witnessed has been geopolitical shock headlines (i.e., North Korea, hurricanes, etc.), but JPY strength and risk of sentiment has failed to hold. Locally, there have been few developments outside of North Korea that are driving the Yen. The driver of the trend in USD/JPY appears to be the view that investors continue to press USD short positions.

United States economic pessimism continues to persist surrounded by the dualistic threat of monetary policy and action, or future hikes are priced out and potential debt ceiling confrontation later this month. The monetary policy caution was highlighted by Lael Brainard of the Federal Reserve Board of Governors who urged caution as she was concerned about persistently low inflation despite full employment.

Beyond concerns of the debt ceiling and monetary policy and action areconcerns that the USD is overpriced still by some of the more fundamental aspects of currency valuation. Recently, the OECD has said the dollar is roughly 13% overvalued against the EUR in terms of purchasing power parity (PPP) and was recently at a 30% premium to the yen from a PPP basis. Additionally, the current account deficit in the US compared to significant surpluses in Germany and Japan suggest a more fundamental view of a weaker USD. Lastly, the positive correlation a bond yields (TNX) and the US dollar seemed to paint a bearish picture for the USD as US Treasury yieldslook set to resume their multi-decade trend lower.

Technical Notes:

While the yen has failed to strengthen to new 2017 highs as other currencies like the EUR and Canadian Dollar have against the USD, there is focus on a recent outsized reversal and positively diverging oscillators that could help support USD/JPY as it trades against a 12–month trend line. USD/JPY is also trading within the price range of extreme day of 2017 (109.05 – 108.13). Extreme day price range can often act as strong support and has for multiple tests up USD/TTY.

However, traders may want to take advice from USD/CAD, which broke below support today to a new 2017 low (new highs for CAD), which helps place favor and the larger bearish dollar trend continuing. Resistance on a bounce in USD/JPYis focused on 110.43 – 95 which is a combination of internal resistance and Fibonacci levels.

Two important insights can be derived from chart below. First, you can see that momentum is failing to make new lows as prices test support of the 2017 extreme day price range mentioned above. Second, you also notice that the highly correlated Japanese large-cap index, Nikkei 225 is tracing a similar pattern. While not productive, the correlation favors that a bounce in the Nikkei 225 would likely align with a bounce in USD/JPY whereas a breakdown, which would support the larger USD bear trend would likely align with a drop in the Nikkei 225 that can easily be confirmed.

Daily USD/JPY Chart: Working to hold the (trend) line as risk-off sentiment fails to stick

Chart Created by Tyler Yell, CMT

USD/JPY Insight from IG Client Positioning: 75% net-long exposure favors contrarian downside bias.

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.

USDJPY: Retail trader data shows 75.0% of traders are net-long with the ratio of traders long to short at 2.99 to 1. In fact, traders have remained net-long since Jul 18 when USDJPY traded near 113.891; theprice has moved 4.3% lower since then. The number of traders net-long is 23.7% higher than yesterday and 27.9% higher from last week, while the number of traders net-short is 13.6% lower than yesterday and 8.3% 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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