USD/JPY: negative divergence suggests caution - Scotiabank

Eric Theoret, Strategist at Scotiabank noted that USD/JPY short-term technicals are bullish to neutral with a negative divergence observed through much of December, suggesting caution for those looking to continued USD/JPY gains.

Key Quotes

“JPY is up 0.2% vs. the USD while underperforming all of the G10 currencies with the exception of CHF, a relative underperformer in an environment of broad-based USD weakness. Local markets have reopened following a two-day holiday and the Nikkei has delivered an impressive 2.5% gain in its first trading session of 2017.”

“The pro-risk tone should maintain pressure on JPY, adding to weakness generated by the ongoing widening in the 2Y U.S.-Japan yield spread—pushing above 142bpts to fresh multi-week highs at levels last seen in mid-December. Measures of implied JPY volatility are softening, eroding the modest premium for protection against JPY strength.”

“USDJPY short-term technicals: bullish-neutral—the MACD is neutral and the RSI is moderating from its recent, extended, overbought highs. Negative divergence has also been observed through much of December, suggesting caution for those looking to continued USDJPY gains. The 9 day MA has flat-lined. Resistance is expected at 118.20 and support is anticipated around the 21 day MA (116.76).”