Speculators lifted their bearish stance on the Japanese yen to the highest level in nearly a year as the currency extended its slide against the dollar as markets boosted bets on a Federal Reserve hike in US interest rates. The sharp upward trend gains for the USD/JPY currency pair reached the 140.72 resistance level, the highest for the currency pair in six months, and closed the week's trading, stable around 140.60.
Overall, leveraged funds increased their net short positions on the yen by 10,986 contracts to 53,706 contracts, the highest level since June last year, according to data from the Commodity Futures Trading Commission for the week to May 23. The Japanese yen fell more than 3% in May, the third worst performer among its G10 peers against the broadly stronger dollar.
While the world's major central banks were raising interest rates to curb inflation, the Bank of Japan maintained a very loose policy, with new bank governor Kazuo Ueda saying repeatedly that it would patiently continue monetary easing. While the spread has underscored monetary policy divergence and weighed on the yen, some analysts are calling it undervalued and suggesting a reversal in trend and see room for the BoJ to start updating yield curve control in the coming months.
UBS, for its part, expects the BoJ to adjust its yield curve control sometime in July-October, resulting in a 15% jump for the yen by the end of the year. Societe Generale sees the currency rising 7% in the next few weeks.
Economic Outlook
The USD/JPY currency pair is trading affected by the results of recent economic data. US Durable Goods Orders for April exceeded the expected change of -1% with a change of -1.1%. Non-defense capital goods orders for the period also exceeded the estimated change of -0.2% with a change of 1.4%. On the other hand, core PCE price index for April exceeded the expected performance (MoM) by 0.3% with a change of -0.4%. The equivalent (yoy) also beat estimates of 4.6% with a change of 4.7%. And earlier in the week, the US preliminary annual GDP for the first quarter beat the expected change of 1.1% with a change of 1.3%.
In Japan, the Confidence Index for March surpassed the expected reading of 98.7 with a reading of 98.8, while the Leading Economic Index beat expectations at 97.5 with a reading of 97.7. Elsewhere, Tokyo CPI for May missed the expected (yoy) change of 3.9% with a change of 3.2%. The CPI for ex-food energy decreased to 4.3% with a change of 3.9%, while the CPI for non-fresh food lost 3.3% with a change of 3.2%.
Technical analysis of the USD/JPY pair:
- In the near term, and according to the performance on the hourly chart, it appears that the USD/JPY is trading within a bullish channel formation.
- This indicates a significant short-term bullish bias in market sentiment.
- Therefore, the bulls will look to extend the current gains towards 141.157 or higher to the resistance 141.589.
- On the other hand, bears will be looking to pounce on a pullback at around 140,044 or lower at 139,549 support.
On the long run, and according to the performance on the daily chart, it appears that the USD/JPY is trading within the formation of an ascending channel. This also shows a long-term bullish bias in market sentiment. Therefore, the bulls will target the long-term gains around 142.793 or higher at the resistance 145.078. On the other hand, bears will look to pounce to take profits at around 138.381 or below at 136.018 support.
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