October 15, 2021 11:35:58

There is really only one major currency pair to discuss today. USD/JPY is confounding a lot of market watchers this week, mainly due to US Treasury bond yields actually coming off previous highs. Ordinarily, this would see the pair move lower.

Of course, risk sentiment has picked up handsomely and this has seen dollar profit-taking in other majors. The commod-$ currencies (AUD, NZD and CAD) in turn have rallied as the energy crisis sees commodities across the board ramp higher.

In this perfect storm for the yen, JPY has capitulated somewhat and remains heavily pressured today. Strong US bank earnings are stoking equity markets while Japan is suffering as well as a heavy energy importer.

Weekly Chart shows upside breakout

After bottoming out at the start of this year at 102.59, prices surged higher to a peak at 110.96 by the end of March. The 200-week moving average acted as support after prices dropped briefly below 108. The pair then consolidated between 109 and 111 over the summer. The longer markets trade in a tight range, the more explosive the following breakout will be. This is usually in the direction of the long-term trend.

We are now into week six of consecutive gains, having taken out 2020 and 2019 highs at 112.22 and 112.40. After some short-term daily consolidation, bulls have pushed north again today to new multi-year highs above 114.

The pair is now approaching the October 2018 high at 114.55. This is in the middle of a zone of previous tops from 2017 through to 2018. Longer-term, there is a Fib level (61.8%) of the move down from the 2015 high at 115.51.

In the meantime, prices are severely overbought on numerous indicators so we should expect a pullback or at least a pause soon. The faster this bullish move continues, the sharper the retracement will be, when it does happen. This probably doesn’t mean 20 to 30 pips but 80 plus pips. The daily consolidation around 113.50 should offer solid initial support ahead of 112.43 which was where the uptrend accelerated.