(Bloomberg) -- The yen's rally may have legs. The currency is laying the foundations for a move toward 100 against the dollar, according to technical charts and investor positioning.
Its gains last week amplified the risk of a full reversal of the yen's slide in late 2016, when it went from 100 to 118 per dollar after the U.S. election of Donald Trump. Speculative positions show traders have strong exposure to a drop in the yen, increasing the chances of a high volatility rally in the first half of this year if shorts run for cover.
- USD/JPY's bounce this week may prove short-lived; the market is coming off a week where the pair underwent significant technical damage, with major lines of defense fractured, opening a door to the 101.20-100 area
- The pair finished last week down 2.4 percent, the steepest weekly decline since July 2016; weekly charts confirm a closing break below 107.49-106.52, a critical support zone comprised of:
- 107.49 -- July 2016 high (a past breakout zone)
- 107.32 -- 2017 low
- 106.52 -- 61.8 percent Fibonacci of June-Dec. 2016 bull swing
- Any move back up for the pair may run into headwinds within the 107.32-107.49 area, the point-of-breakdown and last week's mid-candle body
- Interim target supports are at 103.66 (76.4 percent Fibonacci); larger downside objectives are at 101.23-99.02
- This area is comprised of the 1-STD move of the five-year average (101.23), the Nov. 2016 low (101.20), the August and June 2016 lows (incl. Brexit vote reaction low)
- However, buyers may become very active and absorb supply on approach of 100 as it's the most transacted zone in five years with 15 percent of trading done within 103.13-100.60
- Bearish momentum for the pair has room to build up before running into oversold boundaries; weekly MACD is below the zero line and at the lowest since 2016, with current MACD lead line still at 38th percentile of 2016-2017 range
- CFTC net speculative positioning is still showing strong JPY bearish exposure, with shorts outweighing longs by 44 percent of open interest; this is near the -1 STD line of the five-year range, suggesting the market is facing credible risks of an impulsive or high vol move to 100 if the dominant shorts exit
- Citi's JPY pain index is showing currency traders are long to an extent last seen around Brexit, but still a far cry from the 2015 extremes at 72
- A fairly flat 25-delta option risk-reversal term structure (USD puts in favor) reflects a ramp up of near-term bearish sentiment (1m-1y spread at only 12bps versus 45bps on Feb. 1st)
- USD 1-mo. put premium has widened to 73bps since start of month
- JPY index (using G-10 equal-weight) and UST/JPY 1-mo. ATM implied volatility have executed long-term trend reversals after rallying past bear trendlines from mid-2016
- Relative rotation chart model finds JPY basket as standout relative ‘leader' with the broad measure of JPY performance being the only one featured in the north-east quadrant characterized by rising relative strength and relative momentum (BCWI USD benchmark)
- Finally, when dissecting global macro correlations, gold displays high inverse correlation with USD/JPY and ranks highest in the cross-asset correlation finder on both 30-days and 60-days (-0.64 and -0.62)
- Gold's strong weekly close last week confirms a tactical base near 1300 area and suggests precious metal is poised for a bull extension to 1375 and beyond; such a chart configuration would bode well for USD/JPY bears from an inter-market dynamic
- NOTE: Sejul Gokal is a FICC technical strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
To contact the reporter on this story: Sejul Gokal in London at sgokal1@bloomberg.net.
To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee, Anil Varma
©2018 Bloomberg L.P.
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