Recent decline in USD/JPY shows tentative signs of taking a pause but the decline has also seen a recoupling of USD/JPY back to UST-JGB yield differentials, OCBC FX strategists Frances Cheung and Christopher Wong note.

USD/JPY trades bearishly towards the 153.66 support

“During the period of May - Jul, USD/JPY has gone one way higher while UST-JGB yield differentials narrowed – a decoupling of its traditionally positive correlation – which was unusual. The recent sharp decline in USD/JPY has somewhat reset that anomaly. And if we do expect USD/JPY to play catchup to the historical correlation with UST-JGB yield differentials, then USDJPY may still have room to trade lower.”

“The combination of BoJ policy normalization and Fed possibly cutting rate in due course is a case of monetary policy convergence and should underpin USD/JPY downside. The risk is that BoJ fails to live up to expectations and USDJPY risks a sharp correction upwards. Bearish momentum on daily chart intact while RSI fell into near oversold conditions.”

Cautious of rebound risks for USDJPY from oversold conditions but at the same time, JPY shorts remain at record and uncertainty may see continued unwinding of stretched short position in JPY. Bias to fade rallies. Resistance at 155.50 (100 DMA), 156.80 (76.4% fibo). Support at 153.66 (61.8% fibo retracement of 2024 low to high), 151.60 (200DMA) and 151.10 (50% fibo).