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Trading Into Yen Strength

December 18, 2023
Frank Cabibi

This week the BOJ will announce their latest decision on interest rates and discuss monetary policy going forward for the yen. We also have some important news coming out for the dollar and CAD that we will touch on in today's article.

EdgeFinder Analysis

JP225 is now a bearish reading on the EdgeFinder despite the US indices looking bullish. This is likely due to the recent talks from the BOJ entertaining the idea of higher rates in the future. The trend has flipped as well as COT moving heavier long positions into the JPY currency.

The net change on the index was strongly negative from last week's COT report. However, seasonality is still pointing to a positive month. JP225's direction will mostly depend on what Ueda says tomorrow regarding policy. If he sounds less dovish that before, JPY will likely strengthen and cause their stock market to lose value.

CADJPY does look a little oversold, however, we can't be too convinced of a bullish reversal on the pair just yet. The pair has been in a downtrend since October and has not been able to retest the highs in the 110s. Although we have seen some buying volume in the past week or so, there is still a lot of resistance in the way.

Tomorrow is JPY's interest rate announcement followed by CAD's CPI and GDP later on in the week. Investors will need to see a more restrictive BOJ in the statement, but they are expected to keep rates below 0%. Canada's CPI is expected to come in lower on all fronts, thus suggesting weakness in the currency.

US indices are optimistic in the EdgeFinder's algorithm, and NAS100 is the strongest reading. At +9, the tech index is expected to move closer towards the all time highs at $16,765. All of the categories are looking strong except inflation and retail sentiment.

Recent inflation rates in the US showed a minor increase in Core CPI. However, the benchmark fell closer to the Fed's target range. GDP and PCE numbers are expected to come out as well, and investors would like to see some degree of decline in PCE and GDP.

Retail Spotlight

Retail sentiment is mostly short the US indices with mixed gold sentiment, and long dollar positions.

Smart Money Spotlight

Smart money continues to show risk-on sentiment in the markets as they are increasingly short USD, oil and gold. Meanwhile, long positions are growing in the pound, US30, NZD and bond prices.

Fundamental Spotlight

The current environment on the UJ pair is restrictive in the US and loose in Japan. However, recent talks of a rate cut in the US next year along with BOJ's dovish potential could spark a dynamic shift in sentiment. All year, UJ was strong to the upside because of a tight Fed and ultra-loose BOJ. If this flips, price will likely show a downside reversal.

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