USDJPY saw a return to strong bullish price action this week as the pair jumped over 300 pips higher intraweek from Monday’s opening price of 127.13. This momentum has occurred despite recently released, better-than-expected economic data for Japan, including low unemployment numbers and higher retail sales figures year-over-year. At the time of writing this, USDJPY sits at 129.79 as buying pressure stalls today. Let’s take a closer look as we explore why USDJPY is still worth buying.

Fundamental Analysis

Japan’s economy is in a relatively unique situation compared to the US. At first glance, there appear to be many bearish fundamental indications for USDJPY: Japan’s unemployment rate is an impressive 2.5% (compared to 3.6% in the US), inflation has been climbing consecutively month-over-month, and the quarter-on-quarter GDP contraction in Japan was 0.2%, far less worrisome than the 1.5% contraction in the US.

However, this information is all secondary in light of the Federal Reserve’s hawkishness, as they pursue tight monetary policy through steadily raising benchmark interest rates to cool the overheated US economy, where year-over-year inflation is currently 8.3%. The Bank of Japan, on the other hand, is continuing their ultraloose monetary policy strategy; they are keeping their key short-term interest rate negative, as year-over-year inflation clocks in at a tolerable 2.5%.

In light of this contrast between urgent hawkishness and comfortable dovishness, with both tailored to their countries’ respective inflation threats, the biggest signs point to continued bullish momentum for USDJPY. If traders are waiting for a fundamental catalyst to determine an optimal point of entry, the Bureau of Labor Statistics is revealing further significant employment and hourly earnings data for the US tomorrow, June 3^rd. I am personally waiting for this news before entering a long position.

Technical Analysis

Despite a three-week downtrend, when looking at USDJPY at a 1-week timeframe, there appears to currently be little for bulls to be concerned about. After bullish momentum caused a massive breakout to the upside of the historic 126 resistance zone, not visited since 2015, price action has retested the zone as support, nearly in conjunction with 9 EMA. This retest has since been followed by a renewed surge in buying pressure, which has seemingly paused only in the face of today’s disappointing ADP Non-Farm Employment Change numbers in the US. As these support levels continue to hold, a continuation of the years-long bullish trend seems probable.

Sentiment Analysis

While sentiment analysis can sometimes be tricky to conduct due to ambiguity in COT data and uncertain economic climates, there is little nuance to be found in this case. The stars have aligned as the most recent COT reports show over 77% of institutional traders going long on USD, while only 12.5% are going long on JPY (though this is an increase of nearly 3%). This pairs well with retail sentiment, with only 23% of retail traders currently long on USDJPY, a bullish indication. This data is courtesy of A1 Trading’s EdgeFinder, a helpful tool for any trader aiming to improve their analysis.  

Key Takeaways

• Despite Japan’s impressively low unemployment rate and gradually rising inflation, the Bank of Japan remains far less hawkish than the Federal Reserve, which favors USDJPY.
• I am waiting for tomorrow morning’s data on US employment and hourly earnings before entering a long position.
• Although USDJPY has been selling off for weeks, a retest of support at 9 EMA (on the 1-week timeframe) and the historical 126 zone saw a return to bullish momentum.
• While more institutional traders have been purchasing JPY lately, over 75% of institutional traders remain long on USD, while less than 15% are long on JPY.