DailyFX.com - Japanese Yen Looks Ripe for a Reversal on Huge Week Ahead

Fundamental Forecast for Yen:Bullish

  • USDJPY trades at critical levels ahead of big week
  • Japanese Yen unmoved after lackluster inflation data
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The Japanese Yen traded to fresh lows versus the resurgent US Dollar on a relatively quiet week of trading. Yet the coming days promise significantly more volatility and may ultimately decide whether the USDJPY continues higher or remains within its year-to-date range.

Five major central bank decisions and a market-moving US Nonfarm Payrolls report will likely drive big currency moves in the week ahead. Japanese Yen traders should pay special attention to the Bank of Japan Monetary Policy decision due early Thursday morning, while the interest rate-sensitive USDJPY exchange rate frequently sees sharp volatility on surprises out of US NFPs data.

Traders widely expect the BoJ will keep their Quantitative Easing policies unchanged through their coming meeting, and indeed recent commentary from Governor Kuroda suggests that officials see little urgency in shifting course. It would likely take explicit reference to deflationary risks—unlikely—to force an important reaction in the Yen.

Focus will otherwise fall to US event risk, and recent declines in US Treasury yields point to muted expectations for key data ahead. Traders kept the US Dollar/Japanese Yen exchange rate near year-to-date highs despite the declines in US yields. Yet the breakdown in correlations can only last so long, and the Dollar remains vulnerable on any disappointments in top-tier data.

The risk of a significant Dollar pullback grew further as recent futures data showed large speculators traders hit their most short the Japanese Yen (long USDJPY) since it traded to ¥105 versus the Greenback. They’re likewise at their most long US Dollar versus the Euro (short EURUSD) since the EUR traded to $1.20 in 2012. Big sentiment extremes are only clear in hindsight, but stretched positions underline the risk of an important USD pullback.

It’s shaping up to be a critical week for the USD versus the Yen, Euro, and other major currencies; big event risk might determine whether it holds the highs or sees a seemingly-inevitable reversal.

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