How overbought is too overbought?

There has been a 1400-pip one-way move in USD/JPY since early March. It's one of the largest major FX moves in years, particularly in a time outside a major crisis.

The catalyst was a jump in Treasury yields on the realization of stickier inflation Inflation Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is m Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is m Read this Term that would lead to protracted and rapid global rate hikes, in part due to the Ukraine war.

What's next?

US short-term yields have been pinned around 2.5% since the start of the month and that's the biggest driver for USD/JPY JPY The Japanese yen (JPY) is the official currency of Japan and at the time of writing is the third most-traded currency in the world behind only the US dollar and euro.The JPY is used extensively as a reserve currency and is relied upon by forex traders as a safe haven currency.Originally implemented in 1871, the JPY has had a long history and has survived multiple world wars and other events. This was followed by the creation of the Bank of Japan (BoJ) in 1882 and the full oversight of the JPY by The Japanese yen (JPY) is the official currency of Japan and at the time of writing is the third most-traded currency in the world behind only the US dollar and euro.The JPY is used extensively as a reserve currency and is relied upon by forex traders as a safe haven currency.Originally implemented in 1871, the JPY has had a long history and has survived multiple world wars and other events. This was followed by the creation of the Bank of Japan (BoJ) in 1882 and the full oversight of the JPY by Read this Term but longer-term rates have moved up, adding some fuel. In the meantime, Japan hasn't buckled against pressure on rates or the yen.

But nothing moves in a straight line forever and counter-trend moves in FX are the most violent ones. Has USD/JPY gone too far?

The daily RSI is at 85, the weekly at 87 and monthly at 82. All those are extreme but the weekly chart is also instructive. The last time the weekly RSI got above 85 was in 2014. That was followed shortly after by a retracement to 115.75 from 121.50. Before that, it hit 85 in January 2013 but then continued to rally in the next 4 weeks before a quick 300 pips retracement then a 500 spike from that interim low. The RSI eventually hit 90 on that move.

In both cases, USD/JPY relieved the extremely overbought conditions but ultimately marched higher over the following months.

So recent history argues against chasing this spike but also argues that getting the timing of retracement right is highly challenging. Better to wait for a dip to buy and a new opportunity to ride the rising trend.