Sep 28, 2022 07:10AM +05:00
VOT Research Desk
Discussion Points
The View from the Market:
With the ongoing rise in US Treasury yields, USD/JPY is getting closer to its annual high of 145.90. Additionally, fresh US data may support the exchange rate as the Personal Consumption Expenditure (PCE) Price Index is expected to show stubborn inflation.
Even though Japan intervenes in foreign exchange markets for the first time since 1998, and efforts by the government to strengthen the Japanese Yen may continue to have a limited impact on the exchange rate as the Federal Reserve pursues a restrictive policy, USD/JPY rate approaches annual high ahead of US PCE report.
As a result, evidence of persistent price growth may force the Federal Open Market Committee (FOMC) to retain its approach in combating inflation, as the Summary of Economic Projections (SEP) show a steeper path for US interest rates.
The update to the core US PCE, the Fed’s preferred gauge for inflation, may fuel the recent rise in USD/JPY because the reading is expected to increase to 4.7% per annum in August from 4.6% per annum the month before.
As the Bank of Japan (BoJ) continues to be reluctant to end its easing cycle, the US dollar may continue to outperform its Japanese counterpart. On the other hand, retail sentiment appears poised to continue as traders have been net-short USD/JPY for most of 2022.
Analytics
The number of net-long traders is down 1.28 percent from yesterday and is down 18.44 percent from last week, while the number of net-short traders is up 5.34 percent from yesterday and is down 0.26 percent from last week.
While the drop in net-short interest has done little to alleviate the crowding behavior, as 28.21% of traders were net-long the pair last week, the decline in net-long position comes as USD/JPY nears the annual high (145.90).
However, the Relative Strength Index (RSI) appears to be deviating from price as the recent advance in the exchange rate fails to push the oscillator into oversold territory. Nevertheless, an increase in the core US PCE may generate a bullish reaction in USD/JPY as it fuels speculation for another 75bp Fed rate hike.
As it rises back above the 144.10 (100% expansion) region, USD/JPY appears to be on track to test the annual high (145.90). The next area of interest will be around the August 1998 high (147.67), as the exchange rate appears to be following the positive slope in the 50-Day SMA (138.51).
However, as it struggles to enter the overbought territory, the Relative Strength Index (RSI) appears to be diverging from price.
