USD/JPY: Short squeeze soon? – OCBC

USD/JPY dipped this morning. Safe-haven demand was the main catalyst while UST-JGB yield differentials also narrowed. Pair was last at 144.74 levels, OCBC's FX analysts Frances Cheung and Christopher Wong note, OCBC's FX analysts Frances Cheung and Christopher Wong note.

Risk of short squeeze in USD/JPY is not ruled out

"Daily momentum is mild bearish while RSI fell. Risks skewed to the downside. Support at 144.10 levels. Resistance at 147, 148.75 (21 DMA) and 150.30 (50 DMA). But as UST yields rise, we are also cautious that USD/JPY may revert to trading higher. Risk of short squeeze in USD/JPY is not ruled out."

"But beyond this, we still look for USD/JPY to trend lower, premised on safe-haven flow and Fed- BoJ policy divergence (Fed rate cut cycle while the BoJ has room to further pursue policy normalisation)."

"Wage growth, broadening services inflation and upbeat economic activities in Japan should continue to support BoJ policy normalisation although tariff uncertainty may complicate BoJ outlook to some extent. Fed-BoJ policy divergence should bring about further narrowing of UST-JGB yield differentials, in turn underpinning the broader direction of travel for USDJPY to the downside."