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USD/JPY had been beaten up on the 113 handle and came in just a few pips shy of the 114 handle at 113.96 on Friday with daily RSI headed into overbought territory leaving traders in anticipation of a retracement having squeezed out stale shorts on a stop run between 113.50/80.  

  • The question now should be, ‘Where is fair value?”  

We need to understand the drivers here and quite simply, the US dollar is taking back its leadership role across the board after being ‘unfairly’ treated by investors of late when considering its carry advantage with respect to the divergence between the Fed and, well, the BoJ. The trade war saga continues and indeed there is a massive liquidity offshore shortfall in dollars, so when coupled with rising interest rates, an unwinding of EM-FX will only go in favour of long dollars.  

US economy is also running at full steam

The US economy is also running at full steam without signs of deterioration on that front and indeed this week’s nonfarm payrolls is bound to support further rate hikes ahead as stipulated in the Fed’s increase of dots for December and 2019.

“We expect a solid 180k gain in September nonfarm payroll employment (NFP), a slight deceleration from the 201k gain in August but a healthy reading nonetheless,”

analysts at Nomura argued.

All in all, geopolitical risks are mounting, (Italy, China/US trade wars/ European banking crisis simmers away on the back burner, Brexit, EM-FX/ subsequent correction in global equities), and that should continue to be dollar favourable.   The market has taken the greenback to well deserved 13-month highs via the yen, punishing CHF, euro and the Aussie/Kiwi. A subsequent correction of the 13-month high may come into play once 114.00 and the 161.8% fibo has been triggered, making for a fresh range between there and the 50% fib at 113.00. A break of 114 and extension, (either before or without a retracement), opens a longer-term target to the 2017 high at 114.74.  

USD/JPY levels

Valeria Bednarik, chief analyst at FXStreet explained that the pair nears the 113.90 region, a strong static resistance area as it set monthly highs just below the level in November and December 2017, becoming then a strong psychological barrier:

“Technical readings in the daily chart favor a continued advance from the current level, as the price is further above firmly bullish moving averages, the Momentum indicator heads north almost vertically, while the RSI settled at 71, maintaining a  bullish slope. Shorter term, and according to the 4 hours chart, the risk also leans to the upside, as technical indicators consolidate well into positive territory, as the pair remains at its recent highs and above bullish moving averages.”

Omkar Godbole, an analyst at FXStreet notes that the relative strength index (RSI) has moved 70.00, in overbought territory, for the first time since mid-July:
“Further, slow stochastic is flat lined above 80.00, signaling the rally is overdone for now. The big gap between the MACD line and signal line is also echoing similar signals.Hence, the pair could have a tough time holding above 114.00 in the short-term and may revisit the ascending 10-day EMA support, currently located at 112.96.”