What’s Happening?

The US Dollar has staged a spectacular rally since the US election but some pairs are getting really overbought technically, USDJPY for example.  With the US Thanksgiving holiday coming up this weekend, the potential for a profit taking has been looming large and could leave the pair vulnerable to a correction.

Recall that US markets go quiet after about noon on Wednesday for travel day. The US is closed Thursday for Turkey and Football, then returns for a partial day on Friday. The only traders on the desks instead of out shopping Friday are usually the entry level ones who couldn't get the day off and are under orders not to make any waves.

Technicals:

USDJPY has been soaring since breaking out of a 99.00 to 105.00 measured base but could be getting due for a retrenchment. Trading up near 111.00 the pair has completed an initial measured move out of the base and finds itself having completed a 38%-50% retracement of its previous downtrend.

The recent rally has left the pair really overbought on the RSI and vulnerable to a correction that could take it back toward the 110.00 round number or even 109.00 Fibonacci support. Next potential upside Fibonacci resistance appears near 112.20.

Fundamentals

For the last year, I have been using the following rule of thumb for the number of interest rate hikes the street is pricing into the US Dollar index expecting over the next 12 months as follows:

102.50             Five

100.00             Four

97.50               Three

95.00               Two

92.50               One

90.00               Zero

Last week, there were a ton of Fed speakers who on balance indicated that a December rate hike is likely and more in 2017 probable, The big question now is has the US Dollar moves up too fast and has it priced in more rate increases than we are likely to see?

The impact of Donald Trump’s spending decisions aren't likely to hit until the second half of the year. Also with Fed Chair Yellen likely entering her last year (her term ends in January 2018 and she is likely to be replaced given the campaign rhetoric from the Republican side) one has to wonder if she is going to change much from her gradual course of 1-2 hikes per year.

Above 100.00 appears to be pricing in a much more aggressive Fed than we have seen in nearly a decade leaving the greenback vulnerable to a correction. Note that the last time the USD traded up like this a year ago, it actually started to fall before the December 2015 interest rate increase was announced.

JPY has been hit particularly hard lately relative to two factors: capital outflows form defensive havens which is winding down and anticipation that the Bank of Japan would remain highly stimulative at a time that the Fed is heading more hawkish. Any narrowing of this gap (Fed less hawkish or the Bank of Japan less dovish) could spark a significant correction in this pair.