USDJPY retraces from 12-month high, eyes deeper correction

THE USDJPY scored its highest daily spike since April on Oct 31, 2023, after the Bank of Japan announced its decision to keep short-term interest rates unchanged at -0.1%. On the day of the announcement, the USDJPY rose from 149.02 at the day’s outset to hit a high of 151.7, staging a drastic swing of 1.8 per cent or approximately 2.7 yen within a single trading day. Despite the strong upward move to hit a 12-month high, technical indicators on the USDJPY suggest that a correction to the downside is highly probable. This article will highlight key observations supporting our bearish outlook on the USDJPY for November 2023.

The USDJPY has been in a broad uptrend since the start of the year as evidenced by the price formation of a rising channel. A rising channel is drawn by connecting a series of higher highs, which form the upper resistance band, and the higher lows, which establish the lower support band of the pattern. Since August 2023, the USDJPY has consistently trended within the upper half of the channel and tested the upper resistance level for a few times. However, it has not tested the lower support zone since July.

Within the broad rising channel, another technical setup that points towards a retracement in the USDJPY is the rising wedge formation that has taken shape since September. A rising wedge is a bearish reversal pattern that suggests prices would tend to retrace lower once they complete a breakdown from the formation. It is formed by two upward-sloping trendlines that converge at the top, resembling a cone. This chart pattern that occurred throughout September and October suggests that upward momentum is waning and prices could reverse to the downside upon completion.

In terms of technical indicators, a bearish divergence on the Relative Strength Index (RSI) adds validation to the view that the USDJPY is likely bound for a retracement. RSI, a momentum oscillator, indicates overbought conditions when the reading is above 70, while a reading below 30 illustrates oversold conditions. In a downtrend, the RSI typically stays below the neutrality zone at 50. While the RSI is still above 50 at time or writing, a bearish divergence is evident. This occurs when prices create higher highs, while the RSI readings generate lower highs, indicating that bullish momentum is waning and a retracement lower is probable.

Looking ahead, we expect the USDJPY to test the 150 support level (S1) before rebounding to retest the upper resistance zone below 152 (R1). In the likely event that USDJPY retraces from R1, our technical targets will be set at 150 (S1), 148.50 (S2) and 147.31 (S3).

The writer is strategist at Phillip Nova