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USD/JPY has climbed from just below the 104.00-level at the end of January to a fresh intraday high of 109.23 which has brought the pair back to within touching distance of the high from last June of 109.85. Lee Hardman, Currency Analyst at MUFG Bank, notes that Leveraged Funds start to build short JPY positions and that the USD/JPY pair is most overbought since late in 2016, which leaves room for a correction lower.

Key quotes

“The sharp reversal for USD/JPY has triggered a shake-up in yen positioning in recent weeks. According to the latest IMM report, Leveraged Funds have now flipped to holding short yen positions totalling -6,528 contracts in the week ending the 2nd March after holding long positions totalling 8,376 contracts a couple of weeks ago. It is the largest short yen position since the week ending the 20th October of last year.”

“According to technical indicators such as the RSI, USD/JPY is now the most overbought since late in 2016. A similar setup is also evident for the 10-year US Treasury yield where the RSI recently reached its most overbought levels since late 2016.”

“The historical precedent suggests that USD/JPY is likely to correct lower from overbought levels once the sharp move higher in lon-gterm US yields loses upward momentum. It is too early to say though that the recent sharp move higher in long-term US yields has fully played out yet, although resistance at 1.6% has held since late last month.”