USD/JPY Rate Eyes March 2017 High as Bull Flag Formation Unfolds

Japanese Yen Talking Points

USD/JPY carved a bearish outside day candle as it pulled back from a fresh yearly high (114.97), but the exchange rate may continue to appreciate over the coming days as it breaks out of a bull flag formation.

USD/JPY Rate Eyes March 2017 High as Bull Flag Formation Unfolds

USD/JPY appears to be defending the weekly low (113.75) amid a rebound in longer-dated US Treasury yield, and the move above the November 2017 high (114.74) may push the exchange rate towards the March 2017 high (115.50) as the better-than-expected US Retail Sales report puts pressure on the Federal Reserve to implement higher interest rates sooner rather than later.

Indications of a robust recovery should keep the FOMC on track to remove monetary stimulus as the US Consumer Price Index (CPI) climbs to its highest level since 1990, and it remains to be seen if the Federal Open Market Committee (FOMC) will adjust the forward guidance at its next interest rate decision on December 15 as the central bank is slated to update the Summary of Economic Projections (SEP).

Until then, the US Dollar may continue to appreciate against its Japanese counterpart as the Bank of Japan (BoJ) sticks to its Quantitative and Qualitative Easing (QQE) Program with Yield-Curve Control (YCC), but a further advance in the exchange rate may continue to fuel the tilt in retail sentiment like the behavior seen earlier this year.

The IG Client Sentiment report shows 31.37% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 2.19 to 1.

The number of traders net-long is 5.42% lower than yesterday and 1.09% higher from last week, while the number of traders net-short is 6.44% lower than yesterday and 4.24% lower from last week. The rise in net-long interest has done little to alleviate the crowding behavior as 34.37% of traders were net-long USD/JPY last week, while the decline in net-long position could be a function of stop-loss orders getting triggered as the exchange rate trades to a fresh yearly high (114.97) in November.

With that said, the diverging paths between the FOMC and BoJ may keep USD/JPY afloat as a growing number of Fed officials show a greater willingness to deliver a rate hike in 2022, and the exchange rate may continue to push to fresh 2021 highs throughout the remainder of the year as speculation for higher interest rates lifts US yields.

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 (110.05) 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, and the exchange rate may attempt to test the March 2017 high (115.50) as long as it holds above the Fibonacci overlap around 113.80 (23.6% expansion) to 114.30 (23.6% retracement).
• A break above the March 2017 high (115.50) 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).
• However, failure to hold above the overlap around 113.80 (23.6% expansion) to 114.30 (23.6% retracement) may push USD/JPY back towards the monthly low (112.73), which lines up with the 112.40 (61.8% retracement) to 112.80 (38.2% expansion) region, with the next area of interest coming in around 111.10 (61.8% expansion) to 111.60 (38.2% retracement).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong