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USD/JPY Eyes June High as Fed’s Dudley Endorses Normalization Cycle

June 19
22:06 2017

Talking Points:

USD/CAD Bearish Series at Risk on Slowing Canada Retail Sales, CPI.

USD/JPY Grinds Towards Monthly Opening Range as Fed’s Dudley Endorses Normalization Cycle.

DailyFX Table

USD/CAD stands at risk of extending the decline from earlier this month as it carves a fresh series of lower highs & lows, but the key data prints coming out of Canadian economy may undermine the recent strength in the local currency should the developments dampen the outlook for growth and inflation.

A slowdown in Canada Retail Sales accompanied by a downtick in the Consumer Price Index (CPI) may halt the near-term decline in USD/CAD as it limit’s the Bank of Canada’s (BoC) scope to lift the benchmark interest rate off of the record-low, and Governor Stephen Poloz and Co. may continue to endorse a wait-and-see approach at the next policy meeting on July 12 as ‘the Bank’s three measures of core inflation remain below two percent and wage growth is still subdued, consistent with ongoing excess capacity in the economy.’ Indeed, the BoC may reiterate that ‘the Canadian economy’s adjustment to lower oil prices is largely complete,’ but the central bank may merely stick to the current script as ‘the uncertainties outlined in the April MPR continue to cloud the global and Canadian outlooks.

USD/CAD Daily

USD/CAD Daily Chart

Chart – Created Using Trading View

  • Near-term outlook for USD/CAD remains tilted to the downside as it appears to be capped by the Fibonacci overlap around 1.3280 (61.8% retracement) to 1.3310 (38.2% retracement), with the pair at risk of making a more meaningful run at the 1.3150 (78.6% retracement) hurdle as the Relative Strength Index (RSI) preserves the bearish tilted carried over from the previous month and continues to flirt with oversold territory.
  • A more convincing break of trendline support may expose the key support zone around 1.2970 (23.6% expansion) to 1.2990 (23.6% retracement), which largely lines up with the 2017-low (1.3076).

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The lack of follow-through following the Federal Open Market Committee’s (FOMC) June rate-hike may keep USD/JPY within the monthly range, but the pickup in risk sentiment paired with the batch of fresh Fed rhetoric may prop up the exchange rate as the central bank appears to be on course to further normalize monetary policy over the coming months.

New York Fed President William Dudley struck an upbeat tone and expects wage growth to ‘quicken’ as the U.S. economy approaches full-employment, with the permanent voting-member on the FOMC noting that the central bank intends to ‘tighten monetary policy very judiciously, not to stop the economic expansion, but to sustain the economic expansion over time.’ Even though Fed Fund Futures highlight a less than 50% probability for a move in December, the committee may show a greater willingness to start unloading the balance sheet in the coming months as officials remain confident in achieving the 2% inflation-target over the policy horizon.

USD/JPY Daily

USD/JPY Daily Chart

Chart – Created Using Trading View

  • USD/JPY appears to be making another attempt to break out of the downward trend carried over from 2016 as it grinds towards the June-high (111.71), with the Relative Strength Index (RSI) highlighting the risk for a further advance in the exchange rate as the oscillator clears the bearish formation from May and turns around ahead of oversold territory.
  • A break/close above the topside hurdle around 111.10 (61.8% expansion) to 111.60 (38.2% retracement) should open up the Fibonacci overlap around 112.40 (61.8% retracement) to 112.80 (38.2% expansion), with the next area of interest coming in around 113.80 (23.6% expansion) to 114.30 (23.6% retracement), which largely lines up with the May-high (114.37).
  • Nevertheless, failure to break the monthly opening range may tame the recent rebound in USD/JPY, and the pair may consolidate over the coming days especially as market participants mull the timing of the next Fed rate-hike.

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IG Sentiment

  • Retail trader data shows 66.2% of traders are net-long USD/CAD with the ratio of traders long to short at 1.96 to 1. In fact, traders have remained net-long since June 07 when USD/CAD traded near 1.34474; price has moved 1.6% lower since then. The number of traders net-long is 2.6% higher than yesterday and 43.6% higher from last week, while the number of traders net-short is 28.2% higher than yesterday and 14.0% lower from last week.
  • Retail trader data shows 67.7% of traders are net-long USD/JPY with the ratio of traders long to short at 2.1 to 1. In fact, traders have remained net-long since May 17 when USD/JPY traded near 113.342; price has moved 1.8% lower since then. The number of traders net-long is 12.7% higher than yesterday and 5.8% higher from last week, while the number of traders net-short is 3.3% higher than yesterday and 16.3% lower from last week.

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— Written by David Song, Currency Analyst

To contact David, e-mail [email protected] Follow me on Twitter at @DavidJSong.

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