Japanese Yen Talking Points
USD/JPY gives back the advance from the start of the week amid the recent weakness in longer-dated US Treasury yields, and the exchange rate may face a larger pullback over the remainder of the month as the Relative Strength Index (RSI) continues to fall back from overbought territory.
USD/JPY Correction to Persist Amid Weakness in US Treasury Yields
USD/JPY tags a fresh weekly low (113.39) following the limited reaction to the smaller-than-expected decline in US Durable Goods Orders, and the exchange rate may continue to consolidate ahead of the Federal Reserve interest rate decision on November 3 as the 10-Year Treasury yield weakens for the fourth consecutive day.
![Image of DailyFX Economic Calendar for US](https://a.c-dn.net/b/0DVeA5/USDJPY-Correction-to-Persist-Amid-Weakness-in-US-Treasury-Yields_body_USEconomicCalendar10272021.png)
It remains to be seen if the recent US data prints will influence the Federal Open Market Committee (FOMC) as demand for large-ticket items contracts 0.4% in September versus projections for a 1.1% decline, but indications of a less robust recovery may generate a larger correction in USD/JPY as the update to the Gross Domestic Product (GDP) report is anticipated to show the growth rate rising 2.7% after expanding 6.7% in the second quarter of 2021.
As a result, a marked slowdown in the US economy may produce headwinds for the Dollar as it puts pressure on the Fed to delay its exit strategy, but a positive development may generate a bullish reaction in USD/JPY as the FOMC plans to scale back is purchases of Treasury securities and mortgage-back securities (MBS) later this year.
In turn, the pullback from the monthly high (114.70) may turn out to be a correction in the broader trend amid the deviating paths between the Fed and Bank of Japan (BoJ), but a further decline in USD/JPY may continue to alleviate the tilt in retail sentiment like the behaver seen earlier this year.
![Image of IG Client Sentiment for USD/JPY rate](https://a.c-dn.net/b/2LVs9m/USDJPY-Correction-to-Persist-Amid-Weakness-in-US-Treasury-Yields_body_USDJPYSentiment10272021.png)
The IG Client Sentiment report shows 27.68% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 2.61 to 1.
The number of traders net-long is 16.96% lower than yesterday and 5.94% lower from last week, while the number of traders net-short is 6.97% lower than yesterday and 8.35% lower from last week. The decline in net-long position comes as USD/JPY tags a fresh weekly low (113.39), while the drop in net-short interest has helped to alleviate the tilt in retail sentiment as only 23.07% of traders were net-long the pair last week.
With that said, USD/JPY may continue to consolidate ahead of the next Fed rate decision amid the weakness in longer-dated US yields, and recent developments in the Relative Strength Index (RSI) raises the scope for a further decline in the exchange rate as the indicator falls back from overbought territory to reflect a textbook sell signal.
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USD/JPY Rate Daily Chart
![Image of USD/JPY rate daily chart](https://a.c-dn.net/b/0ugO8u/USDJPY-Correction-to-Persist-Amid-Weakness-in-US-Treasury-Yields_body_USDJPYDailyChart10272021.png)
Source: Trading View
- The broader outlook for USD/JPY remains constructive as it trades to fresh yearly highs in the second half of 2021, with the 200-Day SMA (109.30) 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 recent developments warn of a larger pullback in USD/JPY as the oscillator falls back from overbought territory to offer a textbook sell signal.
- In turn, USD/JPY appears to have reversed course ahead of the November 2017 high (114.74), and lack of momentum to climb back above the Fibonacci overlap around 113.80 (23.6% expansion) to 114.30 (23.6% retracement) keeps the 112.40 (61.8% retracement) to 112.80 (38.2% expansion) region on the radar as the bullish momentum appears to be abating.
- Next area of interest comes in around 111.10 (61.8% expansion) to 111.60 (38.2% retracement), which lines up with the 50-Day SMA (111.21), followed by the 109.40 (50% retracement) to 110.00 (38.2% expansion) region.
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--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong