In terms of the JPY, we have seen it firm up on the USD and think it will now move higher on both the EUR and AUD. Our view of the fundamentals, sentiment and key technical levels to watch below:
JPY Oversold on The Fundamentals
“Recent JPY performance has proved largely distinct from domestic Japanese data. However, there are positive fundamental signs to consider. Exports have held up well while the return of the headline Tankan to positive territory (large manufacturing sentiment), points towards increasingly supportive GDP dynamics.” (Capital Economics) The market however is generally bearish of the JPY with speculators heavily short and holding their biggest short position in over a year.
In our last update on the JPY, we noted the potential for a short-covering rally in the JPY and fully agreed with this view. “The JPY has room to recover some of its weakness seen over the last few weeks. The yen is starting to look increasingly cheap on our valuation dashboard. At the same time, the overhang of short-JPY positions also appears overly stretched.” (TD Securities)
Sentiment: Speculators Hold Biggest JPY Short Position In Over a Year
We can see speculative positioning on the COT Net Traders Positions below and large speculators hold their biggest long position in the USD in over a year and so do small speculators. On the other side commercial hedgers who tend to be right at most big trend reversals are heavily short the USD and long the JPY.
Note: On the COT Net Traders Positions commercials are seen as the “smart money” at turning points if they move strongly against speculators why? The reason is their hedgers and will only move hedges aggressively if they believe prices have moved too far from fair value. A strong move by commercials is normally opposed by large speculators.
While there is no official data for the crosses on the COT, we can calculate from the two majors that make up the cross that speculators are holding their biggest EUR and AUD long positions in over a year. We have seen some strength in the JPY against the USD and now expect it to move higher on the AUD and EUR. Below are the key technical levels of support and resistance in our view in the three pairs
USD/JPY Technical Analysis
We have seen the pair move lower and have a target of 106.00 on the downside and view the USD as a sell back to resistance levels indicated on weakness.
EUR/JPY Technical Analysis
The market is generally bullish on the EUR but in terms of price action, we are seeing the pair move sideways in a channel in low volatility. The low volatility warns of a big move and if we break out of the channel to the downside we would expect a move down to 126.00 to correct the EUR’s overbought condition. If we were to break out to the upside we would look for the rally to fail into the 130.00 level.
AUD/JPY Technical Analysis
The AUD is the proxy risk on currency while the JPY is the number one safe haven but despite recent stock market strength, the AUD has been unable to break out to new daily chart highs. We are seeing the AUD rally today and we are now coming into resistance with 85.00 the key level on the upside. Our view is the AUD is a sell back through today’s low below 84.00 or on weakness off the 85.00 level if we move up to test the level.
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