USD/JPY Bull-Flag Unfolds- Outlook Hinges on Fed Rhetoric

Talking Points:

— USD/JPY Bull-Flag Unfolds Despite Lackluster U.S. PCE; Outlook Hinges on Fed Rhetoric.

— USD/CAD Correction Remains in Play; Canada GDP Report Disappoints.

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USD/JPY pares the decline from earlier this week even as the U.S. Core Personal Consumption Expenditure (PCE), the Fed’s preferred gauge for inflation, unexpectedly downticks in August, and the pair may continue to retrace the decline from the summer months as a bull-flag formation unfolds.

The dollar-yen exchange rate stands at risk of extending the rebound from the 2017-low (107.32)as Fed Fund Futures highlight growing expectation for a December rate-hike, but the slew of data prints due out next week may have a limited impact on USD/JPY price action as U.S. Non-Farm Payrolls (NFP) are projected to increase 75K following the cluster of hurricanes hitting the southern states. With that said, market participants may put increased emphasis on the fresh rhetoric coming out of the Federal Reserve as Dallas Fed President Robert Kaplan, Fed Governor Jerome Powell, Chair Janet Yellen, Philadelphia Fed President Patrick Harker and New York Fed President William Dudley, all 2017-voting members, are scheduled to speak over the days ahead.

USD/JPY Daily Chart

  • Near-term outlook for USD/JPY remains constructive as the pair breaks out of a narrow range and pushes to fresh monthly highs during the last full-week of September, with the next topside hurdle coming in around 113.80 (23.6% expansion) to 114.30 (23.6% retracement), which sits just below the July-high (114.50).
  • However, the lack of momentum to hold above the Fibonacci overlap around 112.40 (61.8% retracement) to 112.80 (38.2% expansion) may generate range-bound conditions during the first full-week of October as the former-resistance zone around 111.10 (61.8% expansion) to 111.60 (38.2% retracement) offers support.
  • Keeping a close eye on the Relative Strength Index (RSI) as it makes another failed attempt to push into overbought territory and starts to deviate from price.

Lackluster data prints coming out of Canada have propped up USD/CAD, with the pair at risk of staging a larger correction as it extends the bullish formation from the 2017-low (1.2061).

USD/CAD pares the decline from the previous day as Canada’s Gross Domestic Product (GDP) report falls short of market expectations, with the economy expanding an annualized 3.8% in July versus forecasts for a 3.9%. Signs of slower-than-expected growth may encourage the Bank of Canada (BoC) to keep the benchmark interest rate on hold at the next meeting on October 25, and Governor Stephen Poloz and Co. may carry a wait-and-see approach into 2018 as the central bank ‘will be looking closely to see how the economy’s adjustment to changes in interest rates may differ from that in previous economic cycles.’

Keep in mind, the broader shift in USD/CAD may continue to unfold over the coming months as the BoC argues ‘the expansion is becoming more broadly-based and self-sustaining,’ and the central bank may continue to prepare Canadian households and businesses for higher borrowing-costs as ‘the level of GDP is now higher than the Bank had expected.’

USD/CAD Daily Chart

Chart — Created Using Trading View

  • Topside targets remain on the radar for USD/CAD as both price and the Relative Strength Index (RSI) establish a bullish formation after failing to close below the 1.2080 (61.8% expansion) hurdle.
  • Break/close above the 1.2510 (78.6% retracement) region may spur a move back towards 1.2620 (50% retracement), with the next area of interest coming in around 1.2770 (38.2% expansion) to 1.2830 (38.2% retracement), which largely lines up with the August-high (1.2778).

Retail Sentiment

Track Retail Sentiment with the New Gauge Developed by DailyFX Based on Trader Positioning

  • Retail trader data shows 52.9% of traders are net-long USD/JPY with the ratio of traders long to short at 1.12 to 1. In fact, traders have remained net-long since July 18 when USD/JPY traded near 113.901; price has moved 1.3% lower since then. The number of traders net-long is 3.3% lower than yesterday and 2.5% lower from last week, while the number of traders net-short is 0.5% higher than yesterday and 1.9% lower from last week.
  • Retail trader data shows 64.4% of traders are net-long USD/CAD with the ratio of traders long to short at 1.81 to 1. In fact, traders have remained net-long since June 07 when USD/CAD traded near 1.35095; price has moved 7.6% lower since then. The number of traders net-long is 7.8% higher than yesterday and 13.9% higher from last week, while the number of traders net-short is 13.6% lower than yesterday and 4.9% higher from last week.

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— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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