USD/JPY dropped sharply on Friday on the back of weak US CPI and retail sales figures. The pair retested a declining trendline and has consolidated near it since.
The declining trendline in USD/JPY connects the high posted in December with the high posted in May and is best seen on a daily chart. The currency pair made a bullish break above it near the start of the month.
USD/JPY hit resistance at 114.42 early last week and has turned lower in a correction. On a 4-hour chart, the pair has fallen below support from a rising trend channel that has contained price action since mid-June. The break lower signals that a correction is taking place against the uptrend that started after the June Fed meeting.
The trendline held Friday’s decline and has held the pair higher today. The first level of resistance at 112.62 held the pair lower on a 4-hour chart earlier today and is viewed as the first hurdle for the pair. USD/JPY was last seen trying to scale above the level. Further resistance comes in at 113.29. Further support for the pair comes in at 112.08 which marks the May 5th low that also acted as resistance on May 24th. Stronger support is found at 111.72 as the level held the pair higher on multiple tests in February.
The highlight this week in terms of economic events is the Bank of Japan monetary policy meeting. The meeting does not have a scheduled time but the policy statement is likely to be released around 22:30 EST on Wednesday.
In the latest COT report, the Japanese yen showed the most significant positioning shift among non-commercials. In the week to July 11th, the net short rose from 75,036 contracts to 112,125 contracts, a roughly 50% increase. The position is now the largest in over a year.
The bulk of the shift was as the result of an aggressive build of short contracts. The size of the shift suggests the markets are looking for a medium to long-term bearish move in the yen especially as all other non-USD majors saw an increase in long exposure.
Although USD/JPY failed to take out resistance at 114.42 last week, the technical outlook for the major yen pairs is encouraging with several pairs making notable technical advances in late June and early July. CAD/JPY will tend to be in focus in the near-term as the pair is on the verge of breaking higher from widely watched inverse head and shoulders pattern that began forming in late 2015.
A confirmed break above the neckline in CAD/JPY, even if triggered by loonie strength, would tend to boost all of the yen pairs.