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JPY: Bounce Off Monday Lows Could Be False Dawn for the Pair

JPY
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  • The bounce off Monday lows for USD/JPY has provided a sense of stability in the pair, but prices remain at risk of a resumption of the short-covering JPY rally, with both leveraged funds and asset managers still maintaining a deep net short JPY position.
  • This is backed up by the prevalence of JPY short-covering among leveraged funds after near-term spikes in realised volatility. As of yesterday, USD/JPY one-week realised vols printed 24 points and the highest outright level since the onset of the COVID pandemic in 2020 - while the net short JPY position among this investor class is off lows, the outright level is inline with the deepest net shorts seen across both 2021 and 2022. 
  • This works in favour of a sell-rallies strategy in USD/JPY - which eyes potential triggers from the front-end of the US curve, geopolitical tensions between Iran/Iraq as well as fragile tech equities across the US, Europe and Japan.
  • 15-minute candles identify 143.48 as support (late NY low/61.8% retracement of bounce) ahead of the 141.70 bear trigger. 
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  • The bounce off Monday lows for USD/JPY has provided a sense of stability in the pair, but prices remain at risk of a resumption of the short-covering JPY rally, with both leveraged funds and asset managers still maintaining a deep net short JPY position.
  • This is backed up by the prevalence of JPY short-covering among leveraged funds after near-term spikes in realised volatility. As of yesterday, USD/JPY one-week realised vols printed 24 points and the highest outright level since the onset of the COVID pandemic in 2020 - while the net short JPY position among this investor class is off lows, the outright level is inline with the deepest net shorts seen across both 2021 and 2022. 
  • This works in favour of a sell-rallies strategy in USD/JPY - which eyes potential triggers from the front-end of the US curve, geopolitical tensions between Iran/Iraq as well as fragile tech equities across the US, Europe and Japan.
  • 15-minute candles identify 143.48 as support (late NY low/61.8% retracement of bounce) ahead of the 141.70 bear trigger.