USD/JPY Rate Reversal Takes Shape Ahead of 50- Day SMA

Japanese Yen Talking Points

USD/JPY appears to have reversed ahead of the 50-Day SMA (127.03) as it carves a series of higher highs and lows, and the exchange rate may track the positive slope in the moving average as it clears the range bound price action from last week.

USD/JPY Rate Reversal Takes Shape Ahead of 50- Day SMA

USD/JPY rallies to a fresh weekly high (130.19) following an unexpected uptick in the US ISM Manufacturing survey, with the exchange rate appreciating nearly 2.5% since the start of the week as it seems to be tracking the rise in US Treasury yields.

The improvement in the ISM survey should keep the Federal Reserve on course to implement higher interest rates as it indicates a robust economy, and recent remarks Governor Christopher Waller suggest the central bank will continue to shift gears in 2022 as the permanent voting-member on the Federal Open Market Committee (FOMC) favors “tightening policy by another 50 basis points for several meetings.”

In addition, Governor Waller offered his support of having “the policy rate at a level above neutral” as the central bank struggles to tame inflation, with the official going onto say that “the strong labor market can handle higher rates without a significant increase in unemployment” while speaking at an event held by the Institute for Monetary and Financial Stability (IMFS).

As a result, the looming update to the US Non-Farm Payrolls (NFP) report may fuel speculation for another 50bp rate hike as the economy is expected to add 325K jobs in May, and it remains to be seen if Chairman Jerome Powell and Co. will forecast a steeper path for the Fed Fund rate at the next interest rate decision on June 15 as the central bank is slated to release the updated Summary of Economic Projections (SEP).

Until then, data prints coming out of the US may keep USD/JPY afloat amid the diverging paths between the FOMC and Bank of Japan (BoJ), while the tilt in retail sentiment looks poised to persist as traders have been net-short the pair for most of 2022.

The IG Client Sentiment report shows 31.51% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 2.17 to 1.

The number of traders net-long is 0.16% higher than yesterday and 23.49% higher from last week, while the number of traders net-short is 4.70% higher than yesterday and 4.98% lower from last week. The jump in net-long position comes as USD/JPY carves a series of higher highs and lows, while the decline in net-short interest has helped to alleviate the crowding behavior as only 26.83% of traders were net-long the pair last month.

With that said, USD/JPY may continue to appreciate ahead of the NFP report amid the rise in US yields, and the exchange rate may continue to track the positive slope in the 50-Day SMA (127.19) as it reveres ahead of the moving average.

USD/JPY Rate Daily Chart

Source: Trading View

• USD/JPY carves a series of higher highs and lows following the string of failed attempts to break/close below the Fibonacci overlap around 126.20 (78.6% expansion) to 127.20 (23.6% retracement), and the exchange rate may continue to track the positive slope in the 50-Day SMA (127.19) as it reveres ahead of the moving average.
• A close above the 129.40 (261.8% expansion) to 130.20 (100% expansion) region, with a break above the yearly high (131.35) opening up the April 2002 high (133.82).
• Will keep a close eye on the Relative Strength Index (RSI) as it breaks out of a downward trend, with a move above 70 in the oscillator likely to be accompanied by a further advance in USD/JPY like the behavior seen earlier this year.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong