Sentiment towards a number of JPY pairs is changing fast after the Bank of Japan Governor Kuroda said that the Japanese central bank will continue with its asset purchases. Now is a great time to check out how traders feel about some of the major indices, as they look for contrarian trading signals via sentiment readings.
Trading sentiment is most effective when retail traders are running counter trend, meaning that they are heavily leaning against established market trends and in increasingly large numbers. Additionally, once big sentiment skews build it can be a powerful sign that the retail crowd are being too one-sided.
Typically, market sentiment readings for an instrument that has reached around 75 to 80 percent is considered to be at an extreme level, while market sentiment readings over 80 to 95 percent is often a strong indication that the trade could be topping or about to reverse at any time.
I will now look at some the strongest sentiment bias amongst the retail crowd right now. Some of the sentiment skews suggest that current price trends in FX, stocks, and precious metals are breaking point and big moves may be nearing.
EURJPY – Sellers Crushed
According to the ActivTrader Market Sentiment tool the majority of traders are extremely bearish towards the Japanese yen currency, despite the latest comments from Government Kuroda said that now is not the time for an exit strategy.
The ActivTrader Market Sentiment tool shows that 92 percent of traders are expecting more downside in the USDJPY pair. Given the bearish bias, sentiment is basically warning that more upside is coming.
It should be noted that sentiment has got worse. I think that retail traders are probably very wrong about the direction of the EURJPY pair, and they are undergoing a severe period of pain right now.
AUDJPY – Not That Sure
The ActivTrader market sentiment tool shows that 44 percent of traders are bullish towards the AUDJPY pair. This is surprising after the RBA just enforced one of its largest ever interest rate hikes.
Traders are in the majority, still expecting more gains, which I tend to not agree with. Given that the Japanese central bank is enforcing QE while the RBA hikes rates, I think more upsides should be expected.
In order for the bulls to be right, we really need to see the AUDJPY pair recover towards the 96.50 area, which would probably signal that more gains are coming in the medium-term.
GBPJPY – Bearish Skew
Market sentiment towards the GBPJPY pair is still very bearish, which is not very surprising given that the USDJPY pair has hit nearly 133.00 today, meaning traders are bearish bullish at the moment.
The ActivTrader market sentiment tool showing that some 72 percent of traders currently bearish towards the GBPJPY pair, meaning that retail is very convinced that the GBPJPY pair is heading lower.
I think that the current sentiment skew is concerning, especially if we consider that the Bank of Japan and the Bank of England are likely going to further diverge on central bank policy this week.
