USD/JPY: correcting from spike highs of 111.39, where next?

USD/USD fading in Tokyo.

All eyes on BoJ.

The yen was sold off hard through the 111 handle to a reach a low of 111.27 vs the greenback overnight, with USD/JPY extending the recovery lows from the previous day's low of 110.19. Currently, USD/JPY is trading at 111.27, up 0.12% on the day, having posted a daily high at 111.41 and low at 111.09.

The dollar was mixed against the G10 while US stocks made big gains and fresh new all time highs. The DXY reached a fresh 3-year low at 90.11 before recovering to 90.81 the high for the NY session before sinking back to 90.22 before closing at 90.73. As for data, US industrial data was 0.9% higher in December after a downwardly revised 0.1% decline in November. We also had some Fed speak, who are generally optimistic and hawkish.

• Fed's Kaplan: Need to move 'gradually, deliberately' to raise rates this year
• Fed's Evans: U.S. economy continues to do extremely well
• Crypto Today: Bleeding in crypto space continues, market cap drops below $500 billion
• Fed's Beige Book: Most Fed districts reported modest-to-moderate price growth since last report
• Wall Street closes day with substantial gains

Analysts at Westpac noted that US yields rose slightly, though much of the increase played out ahead of US trading, both 2 and 10yr yields rising about 2.5bp to 2.15% and 2.56% respectively. "Firmer risk appetite (S&P500 +0.7%) and signs that Republicans are close to passing a stopgap bill to keep the US government open beyond this Friday appear to have been the main drivers," the analysts added. 

All eyes on BoJ

Meanwhile, all eyes are on next week's BoJ meeting. We have already heard from BOJ Governor, Kuroda, although markets have been paying little heed to him as he reiterated his commitment to continue to pursue policies that will push inflation toward the 2% target.

Nonetheless, analysts at Nomura explained that market expectations for BOJ normalisation have been rising gradually, putting downward pressure on yen-crosses. "While expectations for immediate policy change at next week’s meeting are low, Governor Kuroda’s press conference will be crucial. We expect him to keep his dovish stance unchanged, trying to calm market speculation about near-term tightening. A relief rally in USD/JPY is likely if Governor Kuroda confirms a low possibility of imminent policy change," the analysts argued.

USD/JPY levels

Valeria Bednarik, chief analyst at FXStreet explained that after rallying straight from 101.18 to 118.66 by the end of 2016, the pair began a corrective movement that bottomed last August at the 61.8% retracement of the mentioned rally. 

"The 23.6% retracement of such rally at 114.56 to be precise, has been a major cap all through the year, and while the price trades near this last, there's no catalyst at sight that could actually trigger such bullish breakout.  Still, the pair could enter a bullish market only on a steady advance beyond the mentioned 2017 high at 118.60. To confirm a bearish trend, on the other hand, the key is the 108.00 region that could open doors for a steady decline towards the 105.00 price zone" Valeria added.