For many market participants, price action in the dollar has been disappointing recently. In particular, after the dollar (DXY) moved sharply lower into late April (after the equity market SELL-off), many expected a technical bounce, from deeply oversold levels. The DXY, though, continued to weaken, and made a new YTD closing low earlier this month. Mainly, that ongoing weakness reflects the rally in the EUR-USD (given the euro’s large 58% weighting in the DXY), which has pushed higher on emerging signs of cyclical strength in the Eurozone economy.
Against the Yen, though, the US dollar tested a key support level in April (at 141) and has since rallied 6.4% (FIG 1). At the time of those April lows, net speculative SHORT positions in the dollar (against the JPY) had reached their most extreme/crowded level on record (FIG 2). Equally, sentiment readings had fallen to their most bearish since 2011 (FIG 3). In other words, a short squeeze in USDJPY has been underway. Those key sentiment and positioning models are, though, still on/leaning towards BUY and therefore pointing to further upside in the dollar against the YEN (see charts below).
In addition, and unlike Europe, the Japanese economy has lost momentum this year. M1 money supply, for example, has begun contracting Y-o-Y, for the first time since the GFC; consumption growth has been somewhat disappointing, despite rapid wage growth; and consumer confidence has rolled over, even as house prices in key cities have risen further. As well as the positioning and sentiment backdrop, therefore, macro reasons for a weaker YEN (a USDJPY rally) are also building.
Fig 1: USD-JPY spot rate shown with 200 day moving averages
Fig 2: Net speculative futures positioning in USDJPY vs. USDJPY
Fig 3: CONSENSUS Sentiment* towards the YEN (scale INVERTED) vs. USDJPY
*CONSENSUS Sentiment Index created by CONSENSUS, Inc. and is based on market opinion published by brokerage house analysts and independent advisory services. consensus-inc.com Tel: 816-373-3700.