USD / JPY on the cusp of a reversal as all yen crosses report risk trends

Japanese Yen Technical Forecast Talking Points:

• The Japanese Yen is a “funding currency” for the carry trade – a risk-based currency outlook that’s as sensitive to sentiment as stock indices
• As the Dow slips, pairs like GBPJPY, CADJPY and NZDJPY retreat as appetite for ultra-low-yielding carry trades collapses
• The USDJPY is one of the more confusing yen crosses given the dollar’s safe haven status, but the EURJPY can be a good counterweight to this

Technical forecast for the Japanese yen: bullish

Over the past week, the risk aversion that has manifested itself in the markets over the past month has given a strong boost. With benchmarks like the S&P 500 resisting going against the grain until November, many macroeconomic market players advanced assuming that speculative appetite was relentlessly increasing. Yet a look at global indices, emerging market assets and currency-based carry showed a very different picture. Measures of these markets fell for several weeks, and last week’s wave of volatility that finally infected the much-vaunted US indices has finally started to deter complacent bulls.

For the yen crosses, this eventually turned into USDJPY. The benchmark stalled after its impressive upside breakout of 115 which was driven by the dollar’s rate forecasting load, and reduced the old resistance with the biggest one-day drop since March 20, 2020 the previous week. As the decline continued last week, it stepped up the weight of support to 112.25 / 50. If risk aversion persists or the Fed forecast eases, a breakout of that old resistance range and 50 percent Fib of the last 6 year range will carry significant technical weight.

USDJPY Chart with 50 Day SMA (Daily)

Graphic created on TradingView platform

One of the complicating factors of USDJPY is that both currencies are considered to be a form of “safe haven”. While the yen is more sensitive in this case, the dollar’s own attachment to the still dynamic Fed rate forecast can create setbacks when trends might otherwise unfold. There are a few other crosses that have generous rate forecasts that are at risk if risk aversion continues such as GBPJPY and CADJPY; but I like NZDJPY the most on that front. Last week’s cross has moved below trendline support since last June. It is also stretched somewhat after a five week descent with some support range in the 76.00-74.00 area, but if risk aversion is still serious this pair is much simpler.

NZDJPY chart with 50 week moving average (weekly)

Graphic created on TradingView platform

Always open to alternative scenarios, I’m also on the lookout if risk trends stabilize and recover in line with seasonal expectations for December. If that were to happen, a bullish rally is unlikely to be particularly loaded given the nature of liquidity. For this reason, the rebound in the NZDJPY would not be particularly well suited as interest rate expectations would also be more likely to be tamed. Excluding the overt perception of carry trade from the equation, the EURJPY has not really traded with high rate expectations to take advantage of the yen. If the lingering downtrend of the past two months ends with a move above 128.50, this is a well-suited return to the range.

EURJPY Chart with 50 Day SMA (Daily)

Graphic created on TradingView platform

When it comes to speculative positioning, futures traders (via the CFTC’s COT report) show that the yen’s positioning is starting to reverse from multi-year lows in a highly correlated (inverted) picture to the yen. USDJPY price action on a weekly chart. There is still a strong net long outlook on USDJPY (around 80,000 contracts) which could easily fuel a faster pullback if technical hurdles are overcome.

USDJPY chart overlaid with net positioning in speculative futures (weekly)

Graphic created on TradingView platformwith data from the CFTC