USD/JPY Rally Pushes RSI Into Overbought Territory

Japanese Yen Talking Points

USD/JPY registers the longest stretch of advance since April 2011 as it rallies for nine consecutive days, and the exchange rate may continue to appreciate over the coming days as the Relative Strength Index (RSI) climbs back into overbought territory.

USD/JPY Rally Pushes RSI Into Overbought Territory

USD/JPY clears the August 1998 high (147.67) as US Treasury yields climb to fresh yearly highs in October, and the exchange rate may continue to carve a series of higher highs and lows as long over the coming days as the RSI holds above 70.

As a result, USD/JPY may attempt to test the August 1990 (151.65) as the update to the US Consumer Price Index (CPI) points to persistent price growth, and the Federal Reserve may stick to its existing approach in combating inflation as the central bank warns that “the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action.”

In turn, USD/JPY may continue to track the positive slope in the 50-Day SMA (141.66) as evidence of sticky inflation puts pressure on the Federal Open Market Committee (FOMC) to carry out a highly restrictive policy, and the central bank may deliver another 75bp hike at the next interest rate decision on November 2 as the Summary of Economic Projections (SEP) reflect a steeper path for US rates.

Until then, the diverging paths between the Fed and the Bank of Japan (BoJ) may keep USD/JPY afloat as Governor Haruhiko Kuroda and Co. remain reluctant to switch gears, while the tilt in retail sentiment looks poised to persist as traders have been net-short the pair for most of the year.

The IG Client Sentiment (IGCS) report shows only 18.55% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 4.39 to 1.

The number of traders net-long is 15.15% higher than yesterday and 7.64% lower from last week, while the number of traders net-short is 4.99% higher than yesterday and 10.71% higher from last week. The drop in net-long position comes as USD/JPY climbs to a fresh yearly high (149.09), while the rise in net-short interest has fueled the crowding behavior as 22.67% of traders were net-long the pair last week.

With that said, USD/JPY may continue to appreciate over the coming days as it extends the series of higher highs and lows from last week, and the exchange rate may attempt to test the August 1990 (151.65) as the RSI climbs back into overbought territory.

USD/JPY Rate Daily Chart

Source: Trading View

• USD/JPY continues to trade to fresh yearly highs after clearing the August 1998 high (147.67), with the nine-day rally in the exchange rate pushing the Relative Strength Index (RSI) above 70.
• USD/JPY may continue to carve a series of higher highs and lows as long as the RSI holds in overbought territory, with a break/close above the 150.00 (38.2% retracement) handle bringing the August 1990 (151.65) on the radar.
• Next area of interest comes in around July 1990 high (152.25), but failure to clear the 150.00 (38.2% retracement) handle along with a move below 70 in the RSI may lead to a near-term pullback in USD/JPY, with a move below the August 1998 high (147.67) bringing the 144.10 (100% expansion) area back on the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong