USD/JPY Rate Rally to Persist as RSI Holds in Overbought Territory

Japanese Yen Talking Points

USD/JPY rallies to a fresh yearly high (144.99) as it extends the series of higher highs and lows from earlier this week, with the overbought reading in the Relative Strength Index (RSI) likely to be accompanied by a further advance in the exchange rate like the price action from earlier this year.

USD/JPY Rate Rally to Persist as RSI Holds in Overbought Territory

USD/JPY extends the advance from the start of the month despite the recent pullback in US Treasury yields, and the bullish momentum underlying the exchange rate looks poised to persist as long as the RSI holds above 70.

As a result, USD/JPY may attempt to test the August 1998 high (147.67) as Federal Reserve Vice-Chair Lael Brainard warns that “monetary policy will need to be restrictive for some time,” and expectations for higher US interest rates may keep the exchange rate afloat ahead as the central bank appears to be on track to retain its current approach in combating inflation.

In turn, USD/JPY may continue to track the positive slope in the 50-Day SMA (136.67) amid the diverging paths between the FOMC and Bank of Japan (BoJ), and it remains to be seen if the Fed will adjust the forward guidance at its next interest rate decision on September 21 as Chairman Jerome Powell and Co. are slated to update the Summary of Economic Projections (SEP).

Until then, USD/JPY may continue to appreciate amid speculation for another 75bp Fed rate hike, while the tilt in retail sentiment looks poised to persist as traders have been net-short the pair for most of 2022.

The IG Client Sentiment report shows only 21.58% of traders are net-long USD/JPY, with the ratio of traders short to long standing at 3.63 to 1.

The number of traders net-long is 6.78% higher than yesterday and 0.85% lower from last week, while the number of traders net-short is 1.10% higher than yesterday and 14.73% higher from last week. The decline in net-long position comes as USD/JPY trades to a fresh yearly high (144.99), while the rise in net-short interest has fueled the crowding behavior as 24.40% of traders were net-long the pair last week.

With that said, USD/JPY may attempt to test the August 1998 high (147.67) as it extends the series of higher highs and lows from earlier this week, and the overbought reading in the Relative Strength Index (RSI) is likely to be accompanied by a further advance in the exchange rate like the price action from earlier this year.

USD/JPY Rate Daily Chart

Source: Trading View

• USD/JPY rallies to a fresh yearly high (144.99) as it extends the series of higher highs and lows from earlier this week, and the bullish momentum looks poised to persist as long as the Relative Strength Index (RSI) holds above 70.
• The overbought reading in the RSI is likely to be accompanied by a further advance in USD/JPY like the price action earlier this year, but need a close above the 144.10 (100% expansion) region to bring the August 1998 high (147.67) on the radar.
• A break/close above the 150.00 (38.2% retracement) handle opens up the August 1990 high (151.65), but failure to close above the 144.10 (100% expansion) region may lead to a near-term pullback in USD/JPY, with a move below the 143.00 (4.236% expansion) handle bringing the 141.70 (161.8% expansion) area back on the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong