Net-Long JPY Bias May Fuel AUD/JPY, EUR/JPY

Japanese Yen Technical Forecast, AUD/JPY, EUR/JPY, JPY, IGCS – Talking Points:

• A substantial increase in weekly net-long Japanese Yen positions suggest the haven-associated currency may continue to slide against its major counterparts
• AUD/JPY looking to push to fresh monthly highs after bouncing off Fibonacci support
• EUR/JPY may look to consolidate before surging to test yearly high

Technical Forecast for JPY: Bearish

A deteriorating fundamental backdrop has seen retail clients flock to the haven-associated Japanese Yen as the IG client sentiment (IGCS) report shows extreme short positioning in the EUR/JPY and AUD/JPY exchange rates.

Considering IGCS is regarded as a contrarian indicator,the increase in net-long JPY exposure suggests the risk-sensitive Euro and Australian Dollar may continue to climb against their Japanese counterpart.

Furthermore, this bearish signal seems to support the recent developments seen in weekly price action, as the JPY index** looks poised for a sustained pull-back to the 2014 uptrend and June lows.

JPY Index ** Weekly Chart

JPY Index created using TradingView**JPY Index averages USD/JPY, EUR/JPY, GBP/JPY, AUD/JPY

The Japanese Yen declined significantly after carving out a potential Double Top just shy of the 2016 high, with support at February low weekly close temporarily stifling selling enthusiasm and igniting a short-term recovery back above the 50-week moving average.

However, price failed to hold above the trend-defining 50-WMA suggesting JPY may continue to retreat from the yearly extremes, with a close below the 38.2% Fibonacci probably validating the Double Top reversal and igniting a sustained pullback to pivotal support at the February low.

JPY Index** Daily Chart

JPY Index created using TradingView**JPY Index averages USD/JPY, EUR/JPY, GBP/JPY, AUD/JPY

The view on the lower-time frame reinforces the bearish potential seen from a weekly vantage point, as the downtrend extending from the March extremes continues to chaperone the JPY index lower.

A series of daily closes below the sentiment-defining 200-day moving average hints at further losses as the RSI begins to dive into bearish territory below 40.

Entry of the RSI into oversold will probably result in an accelerating decline, with key regions of support falling at the June and February lows.

Should this eventuate, the AUD/JPY and EUR/JPY exchange rates may continue to outperform and potentially surge to re-test their respective yearly highs.

AUD/JPY Daily Chart – Eyeing Re-Test of Yearly Highs

AUD/JPY daily chart created using TradingView

The AUD/JPY exchange rate continues to trade in a tight 100-point range, as buyers are unable to overcome resistance at the June 16 high (75.09).

That said, the path of least resistance looks to be to the upside, as price hugs the uptrend extending from the April low (64.39) after bouncing off support at the 61.8% Fibonacci (74.16).

However, the Momentum indicator notably fading back to its neutral midpoint may temporarily hamper AUD/JPY’s attempts to clear psychological resistance at the 75 level.

Nevertheless, a push to test the December 2019 high (76.25) could be on the cards, as the RSI maintains its constructive trend and continues to climb towards overbought territory. A daily close above the July high probably carving a path for price to retest the yearly high (76.78).

AUD/JPY: Retail trader data shows 37.05% of traders are net-long with the ratio of traders short to long at 1.70 to 1. The number of traders net-long is 8.29% higher than yesterday and 12.89% lower from last week, while the number of traders net-short is 6.05% higher than yesterday and 8.47% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests AUD/JPY prices may continue to rise.

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed AUD/JPY trading bias.

EUR/JPY Daily Chart – Scaling Back to Post-Crisis Highs

EUR/JPY daily chart created using TradingView

The 200-day moving average served as a springboard for the EUR/JPY exchange rate, propelling price through a resistance zone (121.50-121.80) that had successfully capped bullish potential for the last 6 weeks.

With price perched constructively above the 122 level, a sustained push to test the June high (124.43) looks likely if buyers can hurdle resistance at the 38.2% Fibonacci (123.09)

Moreover, the Relative Strength Index may intensify buying pressure as it jumps above 60 into bullish territory, probably igniting a push to test the 124 level if the oscillator can surge into overbought territory.

EUR/JPY: Retail trader data shows 39.45% of traders are net-long with the ratio of traders short to long at 1.53 to 1. The number of traders net-long is 7.12% higher than yesterday and 11.26% lower from last week, while the number of traders net-short is 18.14% higher than yesterday and 59.75% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/JPY prices may continue to rise.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/JPY-bullish contrarian trading bias.

— Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss