USD/JPY Weakness to Persist as Retail Sentiment Remains Stretched

Talking Points:

- USD/JPY Weakness to Persist as Retail Sentiment Remains Stretched.

- USDOLLAR Risks Further Losses on Limited FOMC Guidance.

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USD/JPY

Chart - Created Using FXCM Marketscope 2.0

• USD/JPY stands at risk for further losses as it fails to preserve the monthly opening range and carves a descending channel, while the Relative Strength Index (RSI) appears to be breaking down from the bullish formation carried over from the previous month; failure to push back above 101.20 (50% expansion) may ultimately lead to fresh monthly lows in the exchange rate.
• Even though the Bank of Japan (BoJ) keeps the door open to further embark on its easing cycle, positive real-interest rates accompanied by the ongoing improvement in the Balance of Payment (BoP) may continue to drive demand for the Yen amid the weakening outlook for global growth.
• Need a close below 99.70 (61.8% expansion) to open up the next downside target around 98.30 (38.2% & 78.6% retracements), followed by 97.50 (78.6% expansion).

• The DailyFX Speculative Sentiment Index (SSI) shows the FX crowd remains net-short USD/JPY since July 22, with ratio approaching the post-Brexit extreme reading of +5.28 marked on July 8.
• The ratio currently sits at +4.47 as 82% of traders are long, with long positions 15.4% higher from the previous week, while open interest stands 14.2% above the monthly average.

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USDOLLAR(Ticker: USDollar):

Chart - Created Using FXCM Marketscope 2.0

• The USDOLLAR pares the sharp decline from earlier this week as Fed officials argue a September rate-hike remains on the table, but the failure to preserve the monthly opening range raises the risk for a further decline especially as price & the RSI appear to be carving a bearish pattern.
• With attention turning to the Federal Open Market Committee (FOMC) Minutes, a more upbeat tone may encourage a larger rebound in the greenback as it boosts interest-rate expectations, but more of the same from Chair Janet Yellen and Co. may produce near-term headwinds for the dollar as market participants push out bets for higher borrowing-costs.
• Will keep a close eye on the downside targets, with another closing price below 11,898 (50% retracement) raising the risk for a move back towards 11,822 (23.6% retracement) to 11,843 (38.2% retracement).

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--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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