Hot Debate Among USD/JPY Traders

06/10/2011 6:00 am EST

Focus: FOREX

David Rodriguez

Quantitative Strategist, DailyFX.com

Technicals point higher, while the fundamentals resoundingly disagree, leaving USD/JPY traders to ponder the age-old question, “Do I trust the technicals or fundamentals?”

Crowd positioning in USD/JPY has remained heavily “net long” since the pair traded above 90, giving a consistent contrarian signal to sell into USD/JPY weakness. A very recent jump in USD/JPY long interest likewise gives a contrarian signal that the pair may continue its short-term decline.

chart
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The ratio of long-to-short positions in the USD/JPY stands at a whopping 5.80, as nearly 85% of traders are long.

In detail, long positions are 2.0% lower than yesterday and a sizable 18.4% stronger since last week. Short positions are 0.6% higher than yesterday and 15.8% weaker since last week.

Fundamentally, the fact that retail trading crowds remain heavily net long and continue buying gives a consistent signal that the USD/JPY decline will continue.

However (there’s always a “however,” it seems), after undergoing a fairly intense dropoff from the 85.50 area several days ago, the market looks to have finally found some support in the 80.00 area and could be in the process of carving out some kind of a base.

Look for setbacks to continue to be well supported around 80.00, with only a close below the 79.50 level to give reason for concern.

Technically, from here, we see the risks for a fresh upside extension back towards the recent range highs at 85.50 over the coming weeks, and a break and close back above 81.00 will help to confirm.

This is the fundamental (no pun intended) question all currency traders must wrestle with: “Do you trust the fundamentals or the technicals?” 

Most short-term traders will rely on the charts more often, but with fundamentals like these, it’s a smart idea to keep your stops tight.

By David Rodriguez of DailyFX.com

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