USD/JPY MAY BENEFIT FROM RISKY ASSET SELL-OFF

After Thursday’s sharp decline, USD/JPY ended off the week lower but has already made an attempt to claw back some of those losses. The US dollar index traded slightly higher during the first half of the London session as investors exercise caution amidst continued increases in coronavirus and anticipated restrictions. Equity markets have witnessed a modest sell-off which can bode well for USD/JPY as investors may view it as a safe haven.

CHALLENGES TO AN EXTENDED USD/JPY BULLISH MOVE

The weekly chart shows a long and steady decline in price since the beginning of April, as shown by the descending trendline with 105.00 presenting a key psychological level.

USD/JPY Weekly Chart Presenting a Long-Term View

Chart prepared by Richard Snow, IG

The daily chart once more shows the 105.00 level which is the first level of support that needs to be overcome if the recent bullish momentum is to continue. A close above 105.00 would bring 105.35 into focus before a potential test of the descending trendline.

Failure to close above 105.00 may see another move down to the recent swing low at around 104.34 before potentially testing the 3-month low at 104.00

USD/JPY Daily Chart

Chart prepared by Richard Snow, IG

RISK EVENTS FOR THE WEEK AHEAD

The US announces Q3 GDP data and provide an update on continuous jobless claims while the Bank of Japan have an interest rate announcement where it is widely expected that rates will remain unchanged. US GDP is expected to see a significant increase after Q2’s disappointing -31.4% figure (annualized).

RETAIL TRADER DATA WEIGHTED TO THE SHORT SIDE

• USD/JPY: Retail trader data shows 66.23% of traders are net-long with the ratio of traders long to short at 1.96 to 1. The above chart has stripped away price action to provide a clearer view of current sentiment and the evolution of sentiment over time
• We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/JPY prices may continue to fall.

• The number of traders net-long is 6.58% higher than yesterday and 15.65% higher from last week, while the number of traders net-short is 20.09% higher than yesterday and 20.97% lower from last week.
• Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed USD/JPY reading.