- Equity markets eye fresh multi-month lows.
- USD/JPY may drift lower but the downside looks limited.
The latest sell-off in the equity space has taken the edge off the 17-month USD/JPY rally as investors look to park their money in the traditionally risk-averse Japanese Yen. This move comes against the backdrop of the Bank of Japan letting the Yen depreciate to lows against the US dollar that were last seen in April 2002. The move lower is also being helped by falling US Treasury yields, again a risk-off move, with the UST 10-year benchmark nearly 40 basis points below the May 9 high of 3.20%.
The US dollar rally of the last 17-months is currently taking a break and is on course to post its first weekly loss since the end of March. The US dollar has been a one-way trade since mid-2021 when inflation expectations in the US began to move sharply higher. The Fed is now hiking rates in 50 basis point clips and is expected to keep raising rates throughout this year and into early-mid 2023. While the dollar may slip slightly lower in the short term, it remains firmly underpinned at close to current levels.
US Dollar Basket (DXY) Weekly Price Chart – May 19, 2022
The daily USD/JPY chart shows the pair edging back to support just under 127.00. The CCI indicator shows USD/JPY in oversold territory and at its lowest level since January this year. The 20-day simple moving average is now acting as resistance after supporting the move higher this year, while the 50-day sma is sitting just under the 127 level. A convincing break lower would bring the important 125 level back into focus and unless UST yields and/or risk assets fall sharply, this level should provide strong support for the pair.
USD/JPY Daily Price Chart – May 19, 2022
Retail trader data show that24.75% of traders are net-long with the ratio of traders short to long at 3.04 to 1. The number of traders net-long is 4.82% lower than yesterday and 11.94% lower from last week, while the number of traders net-short is 2.47% lower than yesterday and 0.94% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/JPY prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/JPY-bullish contrarian trading bias.
What is your view on the Japanese Yen – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author via Twitter @nickcawley1.