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Next Phase of USD/JPY Could be Harder to Come By

JPY
  • While the technical trend condition in USD/JPY remains positive, the next phase of strength could be harder to come by without another major shift in Fed policy pricing, as positioning looks stretched and diplomatic blockers to potential intervention appear to peel away.
  • USD/JPY's consolidation just below the cycle highs in recent sessions has prompted a minor unwind of the severely overbought condition, as detailed by the 14-day RSI - which touched 80 at the last session high, putting prices at the most overbought in 18 months.
  • Markets remain on intervention watch and may now be more wary of intraday corrections and positioning wash-outs (as per Tuesday’s 70 pip sell-off), as the CFTC survey puts the JPY net short at more than 50% of open interest for the first time in decades.
  • Earlier this week, South Korean and Japanese finance ministers expressed “serious concerns” over the respective weakness of their currencies, a theme that re-appeared in a meeting with US Treasury Secretary Yellen, who acknowledged the plight of the KRW and JPY – a signal that many have read as a diplomatic greenlight for intervention, if circumstances deem it necessary. The accompanying G7 statement affirmed currency policy, which leaves room for action against “excessive” moves in FX.
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