We saw a big fall in USD/JPY as the record number of speculators who were long were taken out of the market on stop – We have seen some upside in the USD but expect more as the USD corrects its oversold condition.

The Bank of Japan has hinted there will be no more rate hikes for now and we also know that the big move up in the JPY was exaggerated as short carry trades were taken out of the market - with the JPY Overbought, no rises coming soon and a low interest rate to attract carry trades back short the JPY.

“Japan's economy is not in a situation where the Bank may fall behind the curve if it does not raise the policy interest rate at a certain pace,” the deputy governor said in part of his speech. “Therefore, the Bank will not raise its policy interest rate when financial and capital markets are unstable.”(Shunichi Uchida Bank of Japan)

“Financial and capital markets have seen a rapid weakening of the U.S. dollar and a decline in stock prices worldwide, triggered by the growing concern over a slowdown in the U.S.,” Uchida said. “As a result of the correction of the yen's depreciation, the upside risk to prices arising from higher import prices has decreased.” basically putting the market on notice that no rate hike is coming soon.

Interest rate differentials favor the USD

“The Bank of Japan is engaging in damage control. As criticism of its hawkish hike mounts. The BOJ is now only expected to hike 15 bp over the next 12 months, down from 50 bp expected right after its hawkish hike.” (Elias Haddad Brown Brothers Harriman.)

Also we need to keep in mind the market is looking for 100 bps in cuts from the Fed before year end which we think will not happen. While the US economy is slowing the slowup is gradual also inflation remains stubborn. Finally, If Trump were to win the election in November we would expect his policies to be inflationary so we dont see the Fed cutting heavily before the election result.

Sentiment

We can see that the big speculative short position and commercial long position as gone – the hitting of speculative stops is over and we now expect carry trades to re-enter USD longs.

Technical Analysis

Our view of the key levels of support and resistance to look out for below.