USD/JPY Forecast: Oversold and around key 38.2% Fib level

Having closed below 108.00 on Tuesday, the USD/JPY pair extended the losses to 106.30  today - the lowest level since November 2016. As of writing, the pair is trading around 106.64 - 38.2% Fibonacci retracement of the rally from 2011 low to June 2015 high.

Yen bid as yields rising for all the wrong reasons?

It is worth noting that rally in the JPY seen in the last 12 hours contradicts the post-US CPI uptick in the treasury yields. Also, the resilience shown by US stocks (to rising yields) failed to keep Yen bulls at bay.

This could be an indication the yields are rising for all the wrong reasons - fiscal profligacy. Further, the dip in the Japanese Yen crosses could be warning the markets are heading towards another round of risk aversion.   

Aso talks down need for FX intervention

The Japanese Yen has appreciated close to 6 percent in the last five days, hence speculation is on the rise that the Bank of Japan (BOJ) and Japanese government may act, however, earlier today Finance Minister Aso talked down the need for FX intervention. So, Yen bulls have little reason to fear.

That said, the spot is looking oversold, and could see a corrective rally in the short-term, according to technical charts.

Monthly chart - Pair flirts with a confluence of key fib levels

• The pair is trading around key fib levels: 106.48 - 61.8% Fibonacci retracement of rally from 2016 low - December 2016 high, 106.59 - 38.2% Fibonacci retracement of rally from 2011 low - 2015 high.
• The relative strength index (RSI) is biased bearish.

Daily chart - RSI points to corrective rally

• Throughout the bear run (from Dec 2016 high till date) the RSI below 30.00 has yielded a technical correction.

4-hour chart - signs of bullish divergence

The pair has been creating lower lows, but the RSI has diverged, indicating the bearish move is weakening. It adds credence to the idea of short-term correction put forward by the daily RSI.

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• A corrective rally looks likely, with immediate upside capped around the downward sloping 1-hour 50-MA (currently seen at 107.35.
• Only a close above 108.25 (Jan. 26 low) would signal a short-term bottom is in place and may allow for a stronger gain towards 109.70-110.00 levels.
• Meanwhile, failure to capitalize on signs of bullish divergence on 4-hour chart (4-hour close below 106.30) could push the spot down to 105.72 (monthly 200-MA).