USD/JPY, supported at 113.85, returns to 114.30 area

• USD/JPY, supported at 113.85, returns to 114.30 area.
• USD/JPY rally halts at 108.15 and the pair retreats to 107.30.
• The dollar is testing trendline support at 107.30/40 area.

The US dollar has regained lost ground, after a weak opening against the Japanese yen on Tuesday. The pair retreated from the three-year high at 114.45 hit on Monday, to session lows at 113.85 before bouncing up and returning to the 114.30 area.

Risk appetite and flat US yields have weighed on the USD

The JPY attempted to bounce up, after having depreciated nearly 5% over the last four weeks. A higher risk appetite on the back of upbeat quarterly earnings results at Johnson and Johnson and Travelers had revived appetite for risk, while the consolidation of US T-Bond yields curbed demand for the USD offering some respite to its main rivals.

The yen’s rebound, however, has been short-lived. The Japanese currency, particularly sensitive to monetary policy differentials, remains heavy while the market positions for an imminent announcement that the Federal Reserve starts to taper its massive stimulus program. These expectations have been widening the treasury yield gap between the US and Japan -whose central bank maintains the 10-year note near zero through a yield control curve- which is crushing investors’ appeal for the yen.

USD/JPY: Weakness seen as corrective while above 112.40 – Credit Suisse

From a technical point of view, the FX Analysis team at Credit Suisse sees the pair biased higher while 112.40 support remains intact: “With a major base in place above the 112.40 high of 2019, we maintain our view that weakness will be corrective and temporary only. A clear break of 113.99 should mark a near-term top to add weight to our view for a setback to 113.81/61 initially, with fresh buyers expected here for now. A break can see a deeper retreat towards 113.08/04 but this will ideally prove the limit of the downturn.”

Technical levels to watch