– Dollar has surged versus the Yen and tests major resistance
– US Treasury yields have likewise surged, the correlation to the Yen remains strong
– We like the USDJPY higher because of yields and a major shift in retail sentiment
The USDJPY trades at critical resistance as it nears the ¥100 mark. Why might it continue higher? Here are five charts that tell the story.
US Dollar Surges vs Japanese Yen and Trades at Critical Resistance
Source: FXCM Trading Station Desktop, Prepared by David Rodriguez
To understand the USDJPY surge and gauge the likelihood of a further breakout, we take a look at a key driver: yields.
USDJPY Surges and Trades near Critical Resistance as Yields Rise
Data source: Bloomberg
The correlation between the US Dollar/Japanese Yen exchange rate and the US 10-year Treasury Note yield trades near multi-year highs, and it’s critical to note that yields have broken key resistance.
US 10-Year Treasury Note Yield Breaks Key Resistance at 50-day and 100-day Simple Moving Averages
Data source: Bloomberg
Viewed from a yields/correlation perspective, we believe the USDJPY may indeed trade on to fresh highs. Adding further conviction to our USDJPY-bullish calls are two factors.
1. The recent surge in US Nonfarm Payrolls figures has forced a material shift in US Federal Reserve interest rate expectations. Treasury yields may have forced a sustained break higher and could take the USDJPY to further highs.
2. A substantial shift in forex trader sentiment may help confirm the USDJPY turn.
Retail Forex Traders Have Sold Aggressively into the USDJPY Rally, Pointing to Further Gains
Source: FXCM Execution Desk Data
Retail forex short interest in the USDJPY has surged 80 percent since last week and is now at its highest since the pair traded above ¥103 in May. Our sentiment-based Momentum2 system is now long USDJPY from ¥99.06.
We like said position as long as the pair remains above key intraday support at ¥98.90, and it’s likewise worth noting that the Dow Jones FXCM Dollar Index (ticker: USDOLLAR) trades above significant channel and 200-day SMA resistance.
Source: FXCM Trading Station Desktop, Prepared by David Rodriguez
Obviously any important shifts in price and sentiment could derail our USDJPY-bullish forecast. But in the meantime we like trading it higher. Sign up for future e-mail updates via my e-mail distribution list.
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