USD/JPY pauses for breath after huge upside run
FX markets had started this week off in fairly subdued fashion, though we are seeing a pullback in recent dollar gains this morning. The standout major over the past few weeks has been USD/JPY which of course has a strong positive correlation to US 10-year Treasury yields.
With inflationistas winning the battle against “team transitory”, so bond yields across the globe have ramped up as central banks begin to start reining in bond buying programmes and potentially hiking interest rates. With the US 10-year yield rising from 1.30% to 1.60% since late September, so USD/JPY has surged higher. More positive risk sentiment stoked by strong US bank earnings and the fact that Japan is a net energy importer (during an energy crisis) have simply added fuel to yet more gains in this major.
Weekly Chart shows upside breakout and resistance zone
After bottoming out at the start of this year at 102.59, prices broke out of the descending bear channel and surged higher through Spring. The pair then consolidated between 109 and 111 during the summer months. This type of consolidation has not been seen since 2014 and we know that the longer markets trade in a tight range, the more explosive the following breakout will be. This is usually in the direction of the longer-term trend.
Bulls hit three-year highs last week at 114.46 after taking out 2020 and 2019 highs at 112.22 and 112.40 with six straight weeks of gains. The mid-114s is a major resistance zone with the October 2018 top at 114.55 as well as previous peaks from 2017 through to 2018. The 78.6% retrace of the 2016/2020 decline sits at 114.92.
It is no surprise that we are taking a breather here with the weekly RSI and several shorter-timeframe indicators in overbought territory. The daily consolidation area around 113.50 should offer solid initial support with pullbacks short term and fairly limited in the current environment. Seasonals also support USD/JPY with prices tending to rally from mid-October into year end. A break below 113.00 warns of a larger correction ahead of next support at 112.43 where the uptrend accelerated.