USD/JPY pullback continues following Japanese policymaker jawboning, though pair finds solid support at 122.00

• USD/JPY’s pullback from Monday’s 125.00 highs continued on Tuesday after Japanese policymaker jawboning triggered profit-taking.
• But the pair bounced at 122.00 and many strategists don’t expect a lasting pullback given the Fed’s recent hawkish shift.

USD/JPY’s sharp pullback from multi-year highs as traders mull recent jawboning from Japanese policymakers and assess whether the recent rally has gone too far continued on Tuesday, with the pair at one point testing the 122.00 level during US trade. The pair has since bounced back into the upper 122.00s, but at current levels in the 122.70s still trades lower by about 0.8% on the day and about 1.9% lower versus Monday’s highs around 125.00.

The BoJ this week stepped up its Yield Curve Control efforts to defend the upper limit of its 10-year target range (at 0.25%). The increased purchases mark an increase in monetary stimulus at a time when other major global central banks like the Fed, BoE and ECB are removing such stimulus and helped power the recent melt-up in USD/JPY. But as the pair hit its highest levels since 2015 on Monday at 125.00, and as its 14-day Relative Strength Index (RSI) hit its highest levels since 2014 above 87.00, traders warned that profit-taking and a technical correction was likely.

That profit-taking on USD/JPY long appeared triggered by comments from Japanese Finance Minister Shunichi Suzuki, who said the government would closely watch currency moves to prevent a "bad" weak yen that hurts the economy. “While the comments from Japanese officials overnight are unlikely to reverse the yen weakening trend on their own, they should at least help to slow the recent fast pace of yen selling” said analysts at MUFG.

Strategists at UniCredit said that “the divergence between the US and Japan’s monetary policy will continue to weigh on the yen, which we expect to stabilize at around 125 versus the dollar and probably even beyond that level”. “Our view on the greenback remains positive due to the Federal Reserve’s hawkish stance,” they added. Perhaps it shouldn’t have come as too much of a surprise then to see USD/JPY find support at 122.00. As a barrage of US data (including the latest NFP number) looms and as Fed policymakers throw their weight behind the Fed’s new hawkish rate guidance, a retest of this week’s highs at 125.00 looks very much on the cards.