Japanese Yen Talking Points

USD/JPY extends the advance from the start of the month as the Federal Reserve warns of a further shift in monetary policy, and the overbought reading in the Relative Strength Index (RSI) is likely to be accompanied by a further appreciation in the exchange rate like the price action seen during the previous month.


USD/JPY Approaches Yearly High as RSI Pushes Back Into Overbought Zone

USD/JPY appears to be on course to test the yearly high (125.11) as it tracks the rise in longer-dated US Treasury yields, with recent remarks from Fed Governor Lael Brainard pushing the RSI back above 70 as the permanent voting member on the Federal Open Market Committee (FOMC) insists that the central bank “will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting.

Brainard went onto say that she expects “the balance sheet to shrink considerably more rapidly than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017–19,” and it seems as though the FOMC will continue to adjust its exit strategy over the coming months as “the Committee is prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted.

In turn, USD/JPY may continue to exhibit a bullish trend in 2022 amid the diverging paths between the FOMC and Bank of Japan (BoJ), and the tilt in retail sentiment looks poised to persist as trades have been net-short the pair since late January.

Image of IG Client Sentiment for USD/JPY rate

The IG Client Sentiment report shows 28.91% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 2.46 to 1.

The number of traders net-long is 6.73% lower than yesterday and 42.05% higher from last week, while the number of traders net-short is 0.44% higher than yesterday and 2.10% higher from last week. The jump in net-long interest has helped to alleviate the crowding behavior as 23.57% of traders were net-long USD/JPY last week, while the rise in net-short position comes even as the exchange rate extends the advance from the start of the month.

With that said, USD/JPY may continue to retrace the decline from the yearly high (125.11) amid the rise in US yields, and the exchange rate may stage another attempt to test the 2015 high (125.86) as the RSI climbs back into overbought territory.

USD/JPY Rate Daily Chart

Image of USD/JPY rate daily chart

Source: Trading View

  • USD/JPY appeared to be on track to test the 2015 high (125.86) as it rallied to a fresh yearly high (125.11) in March, with the appreciation in the exchange rate pushing the Relative Strength Index (RSI) into overbought territory for the second time in 2022.
  • A similar scenario has emerged in April as the RSI climbs back above 70, and the overbought reading in the oscillator is likely to be accompanied by a further appreciation in USD/JPY like the price action seen last month.
  • A break above the March high (125.11) brings the 2015 high (125.86) on the radar, with a move above the 126.20 (78.6% expansion) area opening up the May 2002 high (129.09).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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