USD/JPY: The case for a bearish reversal builds
Updated
USD/JPY has delivered a decent trend for bulls so far this year, having risen 14% since the January low. Yet we have been fully aware that net-short exposure to yen futures has approached a historical extreme as USD/JPT prices rose towards 145.
Incidentally, 145 was the upper range of the liquidity gap we mentioned in a previous article which has now been filled, and USD/JPY has printed a bearish engulfing week at the 145 handle.
With risks of yen intervention very real and traders positioned so strongly to the short side of yen futures, we suspect USD/JPY is at or very near an important inflection point. What could make the difference between a natural pullback against the YTD trend or a sharp reversal could be incoming economic data from the US and Japan. A softer-than-expected CPI report for the US could likely help push USD/JPY lower, but the real bearish catalyst could be if the BOJ finally get serious about abandoning their YCC (yield curve control).
Over the near-term, a move to the 140 and 138 handles seem achievable over the coming weeks as part of a much-deserved retracement against a one-sided trend so far this year.
Incidentally, 145 was the upper range of the liquidity gap we mentioned in a previous article which has now been filled, and USD/JPY has printed a bearish engulfing week at the 145 handle.
With risks of yen intervention very real and traders positioned so strongly to the short side of yen futures, we suspect USD/JPY is at or very near an important inflection point. What could make the difference between a natural pullback against the YTD trend or a sharp reversal could be incoming economic data from the US and Japan. A softer-than-expected CPI report for the US could likely help push USD/JPY lower, but the real bearish catalyst could be if the BOJ finally get serious about abandoning their YCC (yield curve control).
Over the near-term, a move to the 140 and 138 handles seem achievable over the coming weeks as part of a much-deserved retracement against a one-sided trend so far this year.
Note
Well, the reversal is certainly underway and the BOJ may be behind the moves. FX positioning remained at extreme levels according to Friday's COT report, but we also need to factor in that data is compiled the prior Tuesday (so it would have missed the meat of the move). We'll have to wait until Friday to see how many yen bears (who were extremely net short) were shaken out. For now, it appears as though USD/JPY wants to pop higher om the daily, but with odds of the BOJ widening their YCC band and the Fed near the end of their tightening cycle, it's a real possibility that an important high has already been seen.
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