USD/JPY downtrend may prolong on rising net-long trades
The US Dollar downtrend against the Japanese Yen may prolong amid a bearish-contrarian trading bias in USD/JPY. Technicals offer medium-term downside potential.
Japanese yen IG client sentiment talking points:
- Technical signals offer a downside USD/JPY outlook
- For upside potential, keep an eye on descending line
USD/JPY IG client sentiment outlook - bearish
The US dollar may face selling pressures ahead, extending its downtrend against the Japanese yen amid decreasing net-short interest. Since the beginning of October, we have seen the number of USD/JPY (大口） traders who are net-long increase from about 50% to about 62%. This is as of the latest IG client sentiment report on October 7. During this time, the yen rose about 0.6% against the greenback.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests that USD/JPY prices may continue to fall. The number of traders who short this pair is about 7.18% lower than what it was one day ago, compared to a 30.13% drop in net short positioning over the past week. The combination of current sentiment and recent changes, therefore, offers a stronger USD/JPY bearish contrarian trading bias.
USD/JPY client positioning
Japanese yen technical analysis – medium-term outlook bearish
Accompanying the bearish outlook from IG Client Sentiment are what could be downside medium-term technical signals from the USD/JPY daily chart. Most notably, back in late July the currency pair finally managed to accelerate losses under rising support from June 2016. Prices have since bounced from the psychological barrier between 104.46 and 105.05, but the dominant downtrend since April remains intact.
This is reinforced by the descending trend line from May – the blue line on the chart below. USD/JPY failed to push above this resistance line on multiple occasions in September. This has left behind another area of critical resistance at 108.48. A daily close above this price may pave the way for overturning the pair’s well-defined downside progression. Otherwise, closing under 106.78 opens the door for another retest of key support.
Learn the basics and process of shorting forex and USD/JPY here
USD/JPY daily chart
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