Japanese Yen Talking Points

USD/JPY trades to a fresh weekly high (113.78) after defending the November low (112.53), and the exchange rate may continue to appreciate over the coming days as it clears the opening range for December.

USD/JPY Rate Clears Monthly Opening Range After Defending November Low

USD/JPY extends the advance from the start of the week to largely track the recovery in longer-dated US Treasury yields, and the exchange rate may continue to retrace the decline from the November high (115.52) as St. Louis Fed President James Bullard, who votes on the Federal Open Market Committee (FOMC) in 2022, argues that the central bank “may want to consider removing accommodation at a faster pace.

The comments suggest the FOMC is on track to implement a rate hike in 2022 as Chairman Jerome Powell strikes a hawkish tone in front of US lawmakers, and it remains to be seen if the central bank will adjust the forward guidance as Fed officials are slated to update the Summary of Economic Projections (SEP) at their last meeting for 2021.

Until then, speculation for higher US interest rates may keep USD/JPY afloat ahead of the Fed rate decision on December 15, but a larger rebound in the exchange rate may fuel the tilt in retail sentiment like the behavior seen earlier this year.

Image of IG Client Sentiment for USD/JPY rate

The IG Client Sentiment report shows only 39.37% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 1.54 to 1.

The number of traders net-long is 7.38% higher than yesterday and 7.76% higher from last week, while the number of traders net-short is 5.97% higher than yesterday and 5.14% higher from last week. The rise in net-long position comes as USD/JPY trades to a fresh weekly high (113.78), while the rise in net-short interest has fueled the crowding behavior as 40.57% of traders were net-long the pair last week.

With that said, USD/JPY may exhibit a bullish trend throughout the remainder of the year amid the diverging paths between the FOMC and Bank of Japan (BoJ), and the exchange rate may continue to retrace the decline from the November high (115.52) as it clears the opening range for December.

USD/JPY Rate Daily Chart

Image of USD/JPY rate daily chart

Source: Trading View

  • The broader outlook for USD/JPY remains constructive as it trades to fresh yearly highs throughout the second half of 2021, with the 200-Day SMA (110.57) indicating a similar dynamic as it retains the positive slope from earlier this year.
  • The Relative Strength Index (RSI) showed a similar dynamic as it pushed into overbought territory for the first time since the first quarter of 2021, but a textbook sell signal materialized in October as the oscillator fell back from overbought territory to slip below 70.
  • Nevertheless, USD/JPY cleared the November 2017 high (114.74) as it broke out of a bull flag formation, with the exchange rate taking out the March 2017 high (115.50) in November even as the RSI failed to push into overbought territory.
  • In turn, the decline from the yearly high (115.52) may turn out to be a correction in the broader trend as USD/JPY defends the November low (112.53), with the failed attempt to break/close below the 112.40 (61.8% retracement) to 112.40 (38.2% expansion) region pushing the exchange rate back towards the Fibonacci overlap around 113.80 (23.6% expansion) to 114.30 (23.6% retracement).
  • A break above the November high (115.52) opens up the 115.90 (100% expansion) to 116.10 (78.6% expansion) area, with the next region of interest coming in around 117.60 (23.6% retracement) to 117.90 (23.6% retracement).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong





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