Japanese Yen Talking Points
USD/JPY attempts to halt an eight day losing streak as the 10-Year US Treasury yield appears to be defending monthly low (1.53%), but the recent series of lower highs and lows in the exchange rate warns of a further decline as it trades below the 50-Day SMA (108.19) for the first time since January.
USD/JPY Halts Eight Day Decline as US 10 Year Yield Defends April Low
USD/JPY bounces back from a fresh monthly low (107.81) as longer dated Treasury yields trade within the April range, and the exchange rate may continue to consolidate ahead of the Federal Reserve interest rate decision on April 28 as the central bank is widely expected to retain the current course for monetary policy.
It seems as though the Federal Open Market Committee (FOMC) is on a preset course after unveiling the updated Summary of Economic Projections (SEP) at the March meeting, and the central bank may stay on track “increase our holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month” in an effort to achieve above-target inflation.
It remains to be seen if the FOMC will gradually adjust the forward guidance over the coming months as “most participants noted that they viewed the risks to the outlook for inflation as broadly balanced,” but the more of the same from Chairman Jerome Powell and Co. may do little to prop up USD/JPY as the central bank relies on its non-standard tools to achieve its policy targets.
In turn, the recent flip in retail sentiment may continue to dissipate as the crowding behavior from earlier this year resurfaces, with the IG Client Sentiment report showing 53.13% of traders currently net-long USD/JPY as the ratio of traders long to short stands at 1.13 to 1.
The number of traders net-long is 10.65% higher than yesterday and 25.51% higher from last week, while the number of traders net-short is 0.49% lower than yesterday and 6.64% lower from last week. The jump in net-long position has brought back the crowding behavior from earlier this year as only 47.48% of traders were net-long USD/JPY last week, while the decline in net-short interest could be a function of profit taking behavior as the exchange rate attempts to halt an eight day losing streak.
With that said, it remains to be seen if the decline from the March high (110.97) will turn out to be a correction or a change in trend as a ‘golden cross’ takes shape in 2021, but the recent series of lower highs and lows in the exchange rate warns of a further decline as it trades below the 50-Day SMA (108.19) for the first time since January.
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USD/JPY Rate Daily Chart
Source: Trading View
- USD/JPY approached pre-pandemic levels as a ‘golden cross’ materialized in March, with a bull flag formation unfolding during the same period as the exchange rate traded to a fresh yearly high (110.97).
- The Relative Strength Index (RSI) showed a similar dynamic as the indicator climbed above 70 for the first time since February 2020, but the pullback from overbought territory has largely negated the upward trend from this year, with USD/JPY trading below the 50-Day SMA (108.19) for the first time since January.
- The recent series of lower highs and lows raises the scope for a further decline in USD/JPY, but need a close below the Fibonacci overlap around 108.00 (23.6% expansion) to 108.40 (100% expansion) to bring the 107.20 (61.8% expansion) region on the radar.
- However, the string of failed attempts to close below the Fibonacci overlap may keep USD/JPY within the March range, with a break of bearish price sequence bringing the 109.40 (50% retracement) to 110.00 (78.6% expansion) region back on the radar.
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— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong