USDJPY what comes next

This time last Monday, markets were digesting a woeful Japanese Q4 GDP print. Besides a modest sell-off in key Japanese equity indices the TOPIX and Nikkei, other Japanese asset markets including USDJPY and JGB’s barely raised an eyebrow.

By Wednesday afternoon USDJPY had begun ticking higher, reaching a point of no return around 10.30pm (Sydney time) that evening, breaking above the 110.30 high of Mid-January and the downtrend line from the 2015, 125.85 high. This possibility along with the trade idea below was flagged to readers back on the 11^th of February here.

“Should USDJPY break and close above 110.30/40 it would be initial confirmation a rally towards 112.50 is underway. It would also be a catalyst for traders to consider opening longs in USDJPY”

While the technical backdrop was a key factor behind the bullish USDJPY call, there were other forces at work behind the scenes including;

• Japanese trust funds buying a record amount of foreign bonds during January which also involved purchasing USDJPY and XXXJPY.
• The market was positioned the wrong way. Short term accounts were short USDJPY and XXXJPY as a hedge against Covid-19. Longer term accounts were overweight JPY (i.e. short USDJPY).

While short term accounts would have mostly covered their short USDJPY and XXXJPY positions by now, the Japanese GDP shock is likely to see a continuation of Japanese trust fund buying, potentially at a faster rate than previously.  Elsewhere the notoriously slow moving longer term trading community is unlikely to have had sufficient time or opportunity to reduce their JPY longs. Both of these factors support the idea that USDJPY will be bought on dips despite risk-off moves in other risk assets.

For readers that were able to take profit on our trade idea last week, I am looking for a corrective pullback in USDJPY to just below 111.00 to re-open longs with stops placed below 109.65. Keeping in mind that a convincing break/close above last week’s 112.23 high as well as the April 2019 high of 112.40 would be initial confirmation the next leg higher in USDJPY towards 114.25/55 has commenced.

Source Tradingview. The figures stated areas of the 24th of February 2020. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation