USDJPY Jumps On Jobs Report
The bumper US October jobs report, which printed 271k vs 182k expected, alongside a further decline in the unemployment rate has seen investor expectations mounting over the likelihood of a US lift-off in December. The impressive jobs report gave a further boost to USDJPY which has been heading steadily higher over the last month following the October FOMC which saw the Fed very much keeping a December lift-off in play. The two-year rate differential between America and Japan has now widened to just shy of 0.90%, the widest differential since 2010. The widening between these two countries’ rates has seen USDJPY trading firmer though upside has been quite contained given the increase in two year yields.
Playing The Positioning
Whilst JPY short positions have been increasing recently they are still well off the summer highs we saw in JPY downside positioning, leaving plenty of room for further building of JPY shorts. USD Longs have been increasing for the last two weeks with aggregate USD longs around $27.7bln and back to levels last seen in mid August.
Equities In Line, Risk Remains Resilient
Supporting the move higher in USDJPY the Nikkei 225 (Japan’s leading equity index) has been trading higher for over six week’s now. The high level of exporter companies which comprise the Index mean that as JPY depreciates these companies’ profits increase and so too do the companies’ share prices, seeing the Nikkei higher. JPY which had appreciated during the summer due to safe-haven inflow has been weaker recently as risk sentiment remains resilient. Despite global growth concerns, which came acutely into focus as the slow-down in China came to the fore this summer, recent economic releases have failed to show a significant worsening in conditions.
On the domestic front, investor expectations for further Japanese stimulus were unwarranted as the BOJ refrained from announcing an increase in QE at their October meeting. Expectations for further BOJ easing by the year end have since been reduced though the prospect of a US lift-off weighs on the Yen.
Increasing expectations for a US lift-off in December coupled with the room for a significant increase in JPY short positions should pave the way higher for USDJPY in coming weeks.
After breaking out of the post August 24th range that contained price for 3 months, USDJPY has since challenged the broken bullish trend line running from the 2015 lows. This recent surge higher in USDJPY erased a lot of supply at the 121.50 – 122 area which should now act as strong support on a retest from above.
Core: In terms of a position play I will be monitoring price action and lower time frame Order Flow Trader signals on a retest of the aforementioned zone looking to buy for a move back up into the 2015 highs.
Speculative: With retail short positioning increasing to 65% recently there is a chance USDJPY doesn’t see such a deep retracement. Looking to the 60 minute charts shows what could be a bull-flag formation. Look to buy a confirmed break of the channel resistance or a retest once broken.