USDJPY and EURUSD Technical Analysis

The Japanese Yen is staging a very modest fightback against the US Dollar after weeks of unrelenting bullishness towards the greenback. USD/JPY seems tentatively to have made some kind of top at last Monday’s intraday high. That came in at 111.39. The US Dollar has been declining since, part of a broad based retracement which has seen it lower against the New Zealand and Australian Dollars too, even if the Euro remains under a bit of pressure thanks to political worries in Italy.

Still, it may not make sense to bet on a comprehensive turnaround in US Dollar sentiment just yet. USD/JPY's retracement has been quite modest and for the moment at least seems limited to a support zone derived from the previous significant peaks, which were made in early February.

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The theme of selling EURUSD has shown no signs of abating with the pair now trading around the mid-1.16 area. Last week saw the trendline dating back to January 2017 offer some mild support on Wednesday, however, another bout of Euro weakness saw the trendline support ultimately breached. A close below the trendline could provide a telling sign that another leg lower will be in store for the pair.

As we look ahead to next week, risk events on the calendar for the Euro will come in the form of the Eurozone inflation and the latest US NFP report. In terms price action, the aforementioned breach of the Jan'17 trendline sets up run in on the 2016 high situated at 1.1616, while a weekly low from November 7th at 1.1553 looks to be pivotal, a break below will likely see an extension of the bear run. Resistance on the topside resides at 1.1709, marking the 38.2% Fibonacci Retracement of the 1.0340-1.2556 rise, alongside 1.1750 (May 24th high).

EURUSD bulls on the longer term may find comfort in the fact that the Relative Strength Index on the daily chart is in oversold territory, which could indicate that the pair may see a modest reversal in the near-term. However, when the pair has previously been in oversold territory the rebound has been mild at best and followed by another wave of selling.

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Technical Analysis:

Trade Signal
EURJPY is at a weekly support 127.13 , a good place for long term buyers

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USDJPY: Retail trader data shows 52.0% of traders are net-long with the ratio of traders long to short at 1.08 to 1. In fact, traders have remained net-long since May 23 when USDJPY traded near 109.258; price has moved 0.5% lower since then. The number of traders net-long is 2.3% lower than yesterday and 7.0% higher from last week, while the number of traders net-short is 18.9% higher than yesterday and 6.8% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USDJPY prices may continue to fall. 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 USDJPY trading bias.

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USDJPY: Retail trader data shows 53.0% of traders are net-long with the ratio of traders long to short at 1.13 to 1. The number of traders net-long is 3.9% higher than yesterday and 4.1% lower from last week, while the number of traders net-short is 3.1% lower than yesterday and 7.6% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USDJPY prices may continue to fall. Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed USDJPY trading bias.

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Last week, EUR/USD traded relatively in-line with our tempered expectations – the euro chopped around with little net effect for the week as the ECB-driven move from the Thursday before took time to digest. Overall, a second test of significant support held this past week, keeping sellers at bay for the time-being. Will one side or the other win-out in the days ahead, or will it be another week-long bout of choppy price action? The thinking in this corner is that there will be a little more upside, but it may not be easy, so a continuation of last week's wobbly price action will be unsurprising.

With a bit more strength, the euro will quickly find itself contending with the trend-line running lower from a swing-high in April passing over the high from the ECB-day. This could be enough to put a cap on a bounce and turn the euro back towards another test of support. Should we see a clean closing bar break of 11508, look for an acceleration in selling.

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USDJPY: Retail trader data shows 50.0% of traders are net-long with the ratio of traders short to long at 1.0 to 1. The number of traders net-long is 0.5% lower than yesterday and 5.6% higher from last week, while the number of traders net-short is 5.6% lower than yesterday and 6.8% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USDJPY prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current USDJPY price trend may soon reverse lower despite the fact traders remain net-short.

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Despite persistent media fears about a trade war being the death of the global economy, spot and option trades around USD/JPY are seeing blue (or green) skis ahead. The Yen, typically a barometer of risk sentiment and seen as a bit of a haven asset, continues to weaken and fell to the lowest levels against the USD on Wednesday since early January.
In alignment with a higher spot USDJPY was the US Treasury 2-year yields. The US PPI final figures showed the highest demand since 2011.

FX traders tend to become accustomed to looking at JPY crosses the first time anything seen as negative emerges in the media. Therefore, when news emerged about the initiation of a Trade War as US President Trump began tariffs on China, the initial thought was likely that USD/JPY was going to respond by falling from Trendline resistance.
However, the Japan economy is undoubtedly an export economy. A key part of Abenomics was to encourage inflation through increased business activity that was helped by a weak ¥ though this was not outright stated.

The problem, as outline by Vincent Cignarella of Bloomberg is that the two largest customers of Japan’s goods are the two countries taking the headlines as the key players in the trade war. At the same time, ¥ strength has been absent and likely for good reason.

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Coming into 2018, the pair was continuing to rally as the Euro remained strong, driven in-large part by expectations for a hawkish shift at the ECB. Meanwhile, the Yen remained weak as the BoJ was expected to remain loose and passive, creating a symbiotic setup in EUR/JPY that supported the bullish advance. That theme reversed in early-February, and the bearish price action in EUR/JPY remained until the end of May & all the way until the 125.00 psychological level came into play. The month of June and the first half of July saw the pair get back to its bullish ways, eventually eclipsing the 130.00 psychological level again, and that's about the time that another shift began to show in the pair.

At this stage, macro forces would appear to be at odds with bullish reversal plays in the pair, and given the build of support at this key level on the chart over the past week, traders can look to bearish breakouts should new lows print below the Fibonacci level.

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A bullish bias remains after USD/JPY broke above a three-year trendline and continues to trade strongly in a supportive market. Supportive forces include Japanese equities via the Nikkei 225 that is testing 2018 highs (just like USD/JPY,) alongside the highly correlated (40-day rolling at +0.8921) US Treasury 2yr yield that has risen from 2.58 in mid-August when USDJPY traded at 109.97 to 2.839 today, which is a rise of 25.4bps or 9.8% as the Fed is expected to be more hawkish on an overheating US Economy.

Traders should also note the atrocious bid-to-cover ratio on Monday’s US Treasury 2yr auction. The bid/cover of 2.44 was at the lowest percentile of the last 12 auctions. Such a weak bid-to-cover signals weak demand for front-end US Treasuries that could mean the yield is likely to move higher, and could take USD/JPY higher with it.

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