USD/CAD, USD/JPY, GBP/JPY: Sentiment Snapshot

IG Client Sentiment Analysis:

USD/CAD: Sideways dollar and elevated oil prices support current bearish trend
USD/JPY: Recent pullback and changes in ST positioning suggest a stronger pullback may be at hand
GBP/JPY: Strong bull trend may look for a short term breather, 77% net-short

Throughout this article we will analyze a number of interesting markets within the context of current IG client sentiment. We typically take a contrarian view to heavily one-sided sentiment, when observed in strong trending markets.

For more information on how to use IG client sentiment take a look at our sentiment guide.

USD/CAD Charting and Retail Positioning (IG)

The dollar (via the US dollar index ‘DXY’) has shown a bit of weakness lately and has been largely moving sideways as the market struggles to price in relatively bullish Fed minutes (December meeting) and a number of rate hikes forecast in 2022. On the other hand, CAD remains steady, supported by elevated oil prices.

Retail trader data shows 70.28% of traders are net-long with the ratio of traders long to short at 2.37 to 1.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes provides a USD/CAD-bearish contrarian trading bias.

The bearish trend and retail positioning are at odds with each other – as generally witnessed. As a result, USD/CAD may continue to trend lower.

USD/CAD Daily Chart

Chart prepared by Richard Snow, IG

USD/JPY Charting Retail Positioning (IG)

USD/JPY continues to pullback after an impressive start to 2022, printing a high well over 116.00. The Yen has been underperforming, as it would, as other major central banks continue their quest of normalizing monetary policy, which means reducing stimulus and hiking interest rates. With the US and UK expecting to hike rates a number of times in 2022, the Bank of Japan continues its negative interest rate policy in an attempt to boost the economy and spur on inflation.

Retail trader data shows 29.08% of traders are net-long with the ratio of traders short to long at 2.44 to 1
Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current USD/JPY price trend may soon reverse lower despite the fact traders remain net-short.

The recent move lower in USD/JPY has resulted in a reduction in overall short positioning (more bullish on a short term basis) therefore, the contrarian approach to sentiment suggest that the pullback may continue.

USD/JPY Daily Chart

Chart prepared by Richard Snow, IG

GBP/JPY Charting and Retail Positioning (IG)

GBP/JPY is a pair that has been identified as one to watch after the Bank of England (BoE) decided to hike rates in December of 2021 – the first hike since the start of the pandemic. As a result, GBP/JPY has been high up on the list of currency pairs that stand to benefit from a possible ‘carry trade’ in Q1 2022. In fact, this is one of our top trades for the quarter.

GBP/JPY certainly ended 2021 and has begun 2022 on a bullish note but approaches prior resistance – and turning point – at 158.25, whilst remaining in overbought territory.

Retail positioning heavily anticipates a reversal and this collective group of traders often trades against strong prevailing trends.

Retail trader data shows 23.53% of traders are net-long with the ratio of traders short to long at 3.25 to 1.
However, positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes suggests a mixed GBP/JPY trading bias.

Therefore, sentiment and current price action seem to suggest caution. A temporary move lower, considering the overbought condition, is still possible but the strong bullish trend remains in place, meaning lower moves from here could simply result in better levels for bullish continuation plays.