Forex News Trade of the Day for April 30th – Short USD/JPY

USD/JPY may correct lower within longer term bull channel

The failure of USD/JPY to reach the 100.00 level and doubts that the Bank of Japan policy action is sufficient to reach its 2% inflation target within a 2-year time frame have resulted in a near term correction lower in the pair. Net speculative yen positioning as reported by the CFTC’s Commitment of Traders report showed that net shorts were trimmed by 13,681 to -79,730 with a reduction in gross shorts of 14,187. For now, traders seem to be taking profits on USD/JPY longs as central bank action in the respective countries appears set to remain on hold for the time being.

The Bank of Japan has indicated that steps taken were sufficient and are seemingly content to refrain from providing additional measures for now. This has slowed the pace of the decline in the JPY. In the US, the Fed has stepped back from previous rhetoric regarding a tapering of asset purchases as economic data has been soft (inflation and employment figures in particular) which signals the need for ongoing support from the central bank. Continued easing by the Fed may weigh on US treasury yields and the USD while no additional measures from the BoJ is likely to see the JPY and JGB yields slow their declines. Taken together, the implications are for USD/JPY to drift lower for now.

What’s more is that Japanese investors have not participated in yen selling as flow data from Japan’s Ministry of Finance have shown Japanese investors as net sellers of foreign securities. Market participants will be closely monitoring the flow data for a shift in flows as many Japanese asset managers have expressed the likelihood of committing capital overseas in search of yield. Until data confirms the outflow of JPY, the yen may continue to consolidate.

We think that USD/JPY is set to decline further in the near term as it corrects within a longer-term bullish channel. The outlook for the pair is still constructive from a strategic view, however the tactical play looks to be for a move lower. A close below the 21-day simple moving average (SMA) suggests continued downside and brings into view the convergence of the 55-day SMA and 61.8% Fibonacci retracement of the rally from April lows to highs. This area is around the 95.40/60 zone and is currently just above rising channel support. In our view, we are bearish while the pair trades below the 21-day SMA which is currently around the 98.00 figure. A close above may see a rally towards the 100 figure and break above that would likely see another leg higher.