USD/JPY Retail Longs Surge Even as Bullish Momentum Abates

Japanese Yen Talking Point

USD/JPY fails extend the series of lower highs & lows from the previous week, with the recent rebound sparking a further adjustment in retail interest, but developments in the Relative Strength Index (RSI) warn of a further decline in the exchange rate as the oscillator threatens the bullish formation from earlier this year.

The pullback from the monthly-high (112.14) appears to be sputtering even though the U.S. Non-Farm Payrolls (NFP) report saps bets for a Federal Reserve rate-hike, and USD/JPY may continue to consolidate ahead of the next interest rate decision on March 20 as the central bank is widely anticipated to retain the current policy.

In turn, the updates to the Summary of Economic Projections (SEP) may sway foreign exchange markets as the central bank gradually alters the forward-guidance for monetary policy, and it remains to be seen if Fed officials will continue to forecast a longer-run interest rate of 2.75% to 3.00% as the Federal Open Market Committee (FOMC) appears to be abandoning the hiking-cycle.

Keep in mind, the shift in the forward-guidance comes as Fed officials warn ‘that some risks to the downside had increased, including the possibilities of a sharper-than-expected slowdown in global economic growth, particularly in China and Europe, a rapid waning of fiscal policy stimulus, or a further tightening of financial market condition,’ and the weakening outlook for the world economy may largely benefit the Japanese Yen as it drags on carry-trade interest.

Nevertheless, updates to IG Client Sentiment Report reveal a further adjustment in retail interest as 48.0% of traders are now net-long USD/JPY, with the ratio of traders short to long at 1.08 to 1. Traders have been net-short since February 27 when USD/JPY traded near 110.60, with the ratio slipping to an extreme reading earlier this month, but the IG Client Sentiment index has recovered as the exchange rate continues to fall back from the monthly-low (112.14).

A deeper look shows the number of traders net-long is 21.1% higher than yesterday and 23.9% higher from last week, while the number of traders net-short is 11.0% higher than yesterday and 14.8% lower from last week. The surge in net-long position suggests traders are looking for range-bound conditions as USD/JPY retraces the decline from earlier this month, but a further shift in retail interest may bring back the extreme readings that occurred ahead of the currency market flash-crash as the recent pickup in market volatility boosts participation.

With that said, a flip in the IG Client Sentiment index may warn of a broader shift in USD/JPY behavior, with the exchange rate at risk of threatening upward trending channel from earlier this year especially as the Relative Strength Index (RSI) highlights a similar dynamic. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

USD/JPY Daily Chart

• Near-term outlook for USD/JPY remains constructive as both price and the RSI continue to track the upward trends from earlier this year, but the correction following the currency market flash-crash appears to be sputtering amid the lack of momentum to test the Fibonacci overlap around 112.40 (61.8% retracement) to 113.00 (38.2% expansion).

• As a result, failure to hold above the 111.10 (61.8% expansion) to 111.80 (23.6% expansion) region raises the risk for a move back towards 109.40 (50% retracement) to 110.00 (78.6% expansion), which largely lines up with channel support.

• Next downside region of interest comes in around 108.30 (61.8% retracement) to 108.40 (100% expansion), but failure to extend the series of lower highs & lows from the previous week may generate range-bound conditions over the coming days.

For more in-depth analysis, check out the Q1 2019 Forecast for the Japanese Ye