Analys från DailyFX
The USDJPY Breakout is the Real Deal, but Whats the Major Risk?
– USDJPY has broken above major price resistance
– We think the price breakout along with our forex positioning data favors strength
– Key risk is sharp equity market turn lower
We have been calling for US Dollar strength against the Euro and other forex counterparts for a number of weeks now, and indeed we believe that this is the start of a large USDJPY breakout. Why do we believe so and—just as importantly—what could derail the USDJPY surge?
USDJPY Breaks Above Key Resistance, Favors Further Gains
Source: FXCM Trading Station Desktop, Prepared by David Rodriguez
One major reason for Japanese Yen weakness versus its US counterpart has been strength in the Japanese Nikkei 225; the correlation chart below emphasizes the strength of said correlation since the USDJPY set a major low in 2012.
Japanese Yen Weakness May Continue as the Nikkei 225 Surges
Data source: Bloomberg
Of course, this correlation is a double-edged sword; a turn lower in global equity markets could just as easily derail the USDJPY break higher.
In fact we saw a preview of said risk overnight as both the Nikkei and USDJPY tumbled on news of a potential airstrike in the Middle East.
Overnight Stock Market Tumble Underlines Risks to USDJPY Long Trade
Source: FXCM Trading Station Desktop, Prepared by David Rodriguez
We’ll have to keep an especially close eye on equities going forward, as it’s clear that sharp moves could derail the nascent USDJPY breakout. Yet our proprietary forex crowd sentiment data helps confirm that this may in fact be the start of a larger US Dollar breakout.
Major Shift in Forex Sentiment Suggests USDJPY Breakout is the Real Deal
Source: FXCM Execution Desk Data
We typically use our Speculative Sentiment Index data as a contrarian indicator to price action. Or in plain English: when everyone’s buying, we look to sell.
Recently our SSI data showed crowds at their most net-long USDJPY since the start of its impressive reversal in September of last year. That might normally make us bearish as price is likely in a downtrend, but impressively one-sided sentiment likewise warns of a potential turn.
Retail forex long positions in the USDJPY have fallen by a substantial 40 percent from their recent peak, and that has led our sentiment-based Momentum2 trading system to go in the opposite direction.
We like those positions as long as stocks continue to hold gains, and it will be critical to watch the Nikkei’s next moves going forward.
Receive future special reports on the USDJPY, forex positioning, and correlations via my e-mail distribution list with this link.
Forex Correlations Summary
View forex correlations to the SP 500, SP Volatility Index (VIX), Crude Oil Futures prices, US 2-Year Treasury Yields, and Spot Gold prices.
Data source: Bloomberg. Chart source: R
SEE GUIDE ON READING THE ABOVE CHART
— Written by David Rodriguez, Quantitative Strategist for DailyFX.com
David specializes in automated trading strategies. Find out more about our automated sentiment-based strategies on DailyFX PLUS.
Contact and follow David via Twitter: https://twitter.com/DRodriguezFX
What’s inside:
- EURUSD broke the ‘neckline’ of a bearish ‘head-and-shoulders’ pattern, April trend-line
- Resistance in vicinity of 11825/80 likely to keep a lid on further strength
- Targeting the low to mid-11600s with more selling
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Coming into last week we pointed out the likelihood of finally seeing a resolution of the range EURUSD had been stuck in for the past few weeks, and one of the outcomes we made note of as a possibility was for the triggering of a ’head-and-shoulders’ pattern. Indeed, we saw a break of the ’neckline’ along with a drop below the April trend-line. This led to decent selling before a minor bounce took shape during the latter part of last week.
Looking ahead to next week the euro is set up for further losses as the path of least resistance has turned lower. Looking to a capper on any further strength there is resistance in the 11825-11880 area (old support becomes new resistance). As long as the euro stays below this area a downward bias will remain firmly intact.
Looking lower towards support eyes will be on the August low at 11662 and the 2016 high of 11616, of which the latter just happens to align almost precisely with the measured move target of the ‘head-and-shoulders’ pattern (determined by subtracting the height of the pattern from the neckline).
Bottom line: Shorts look set to have the upperhand as a fresh month gets underway as long as the euro remains capped by resistance. On weakness, we’ll be watching how the euro responds to a drop into support levels.
For a longer-term outlook on EURUSD, check out the just released Q4 Forecast.
EURUSD: Daily
—Written by Paul Robinson, Market Analyst
You can receive Paul’s analysis directly via email bysigning up here.
You can follow Paul on Twitter at@PaulRobinonFX.
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
EURUSD: Retail trader data shows 37.3% of traders are net-long with the ratio of traders short to long at 1.68 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.07831; price has moved 9.6% higher since then. The number of traders net-long is 15.4% lower than yesterday and 16.4% higher from last week, while the number of traders net-short is 0.4% higher than yesterday and 10.5% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
GBPUSD: Retail trader data shows 38.2% of traders are net-long with the ratio of traders short to long at 1.62 to 1. In fact, traders have remained net-short since Sep 05 when GBPUSD traded near 1.29615; price has moved 3.4% higher since then. The number of traders net-long is 0.1% higher than yesterday and 13.4% higher from last week, while the number of traders net-short is 10.6% lower than yesterday and 18.3% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse lower despite the fact traders remain net-short.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
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