The Bank of Japan (BoJ) is buying unlimited Japanese government bonds, renewing efforts to cap 10-year yields at 0.25%. The Bank of Japan bought a record 14.8 trillion yen in June, the largest monthly purchase in more than two decades. At face value, the BOJ holds 514.9 trillion yen in long-term government bonds, or 50.4 percent of the total, according to an article in Nikkei Asia, citing QUICK data.
While the 10-year JGB yield remains steady at around 0.25%, the U.S. benchmark Treasury yield is currently trading in a short-term range of 3.00% to 3.50%. U.S. Treasury yields have come under pressure recently as financial markets begin to price in a U.S. recession in 2023, with a rate cut expected by the end of the year. This recessionary repricing is starting to show up on the dollar charts.
The daily chart of USD/JPY is starting to show signs of exhaustion. The recent double top around 136.72 needs to be broken convincingly for the pair to move towards 140, where the market expects the Bank of Japan to intervene verbally in an attempt to prevent further gains in USD/JPY. If the recent double top does hold as resistance, then the pair is likely to fall back to the 131 area, but if the BOJ continues to buy JGBs in unlimited quantities, it will be difficult to break below the 131 area. In this case, USD/JPY may establish a trading range that traders can take advantage of in the coming weeks.
The retail trader data shows that 26.28% of retail traders are net long, with a ratio of shorts to longs of 2.81:1. The number of net long retail traders increased by 6.06% compared with yesterday and decreased by 1.33% compared with last week. The number of net short retail traders increased by 2.02% compared with yesterday and decreased by 7.89% compared with last week.
We generally take a contrarian view of retail trader sentiment, and the fact that retail traders are net short suggests that USD/JPY prices may continue to rise. However, retail traders have reduced their net short positions compared to yesterday and last week. The recent change in sentiment warns that the current USD/JPY price trend could soon reverse, despite the fact that retail traders remain net shorts.