What can traders expect from USD/JPY in a year of US rate hikes?Here are our thoughts.

Talking Points:

• USD/JPY technical strategy: break 110.50 gives Bulls hope
• 200-DMA still acting as resistance, placing a lid on optimism for now
• IGCS continues to forecast bearish pressure on USD/JPY prices

After the Federal Reserve informed markets that they likely were not done hiking rates in 2017, and could continue the pace in 2018 of three hikes a year, USD/JPY has moved higher into long-term resistance. While yields on UST’s are lower and the Yield Curve is flattening, there remains reason to believe that the flattening yield curve caused by the front-end staying supported could also support the long-term uptrend in USD/JPY.

First, the front-end of the US Yield Curve Spread ( the difference between yields over two periods) is likely rising because the Fed is getting “free” rate hikes in the sense that they are hiking in an environment where lending conditions are getting easier, not tighter. Easy money conditions despite a tightening Fed is a similar environment to 2002-2006 when the Greenspan-led Fed hiked multiple times, which still provided enough “easy-money” to fuel the credit crisis of 2007-2009. The argument for easy money in a hiking environment can be seen in a few places. First, the Federal Reserve Bank of Chicago Lending Conditions is showing the easiest lending conditions since 2014, before the Fed started hiking. A similar index from Goldman Sachs is showing easy money, and lastly, the 10-year yield, a common basepoint for long-term loans is lower in the US than before the Fed began their tightening cycle in 2015.

Fundamentally, this sets up the technical picture well that we could see a steady–handed Fed that continues to hike and continues to lift the market for USD/JPY. Especially after the Bank of Japan failed to mention tapering at their recent post-rate announcement press conference.

When looking at the technical picture, you can see a few things on the daily chart and an important development on the shorter hourly chart. First, the daily chart is showing we’re still below the 200-DMA making it difficult to get too excited that the uptrend is back. You’ll notice the 200-DMA aligns with the Ichimoku cloud and prior Fibonacci resistance.

On the positive side, it’s worth noting a ‘base channel’ is acting as support that connects a late October high to the 2017 low. Also, on the short-term chart, we see 5-waves higher, which is an impulsive pattern per Elliott Wave that favors further upside after a three-wave correction. If an impulsive move is underway, I’d expect to see support near 110.66, before advancing higher. A break below 110.66 would open up an argument that the strong downtrend is still in play and not the potential reversal we’re watching to develop.

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Chart Created by Tyler Yell, CMT

USD/JPY IG Trader Sentiment:Japanese Yen sentiment is balancing, helping support upside

What do retail traders’ buy/sell decisions hint about the JPY trend? Find out here!

USDJPY: Retail trader data shows 64.3% of traders are net-long with the ratio of traders long to short at 1.8 to 1. In fact, traders have remained net-long since May 17 when USDJPY traded near 113.342; price has moved 1.8% lower since then. The number of traders net-long is 3.8% lower than yesterday and 3.1% lower from last week, while the number of traders net-short is 1.4% lower than yesterday and 11.1% higher 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. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current USDJPY price trend may soon reverse higher despite the fact traders remain net-long.(Emphasis Mine)

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Written by Tyler Yell, CMT, Currency Analyst Trading Instructor for DailyFX.com

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