We have gone short USDJPY at 121.65, the resistance level dating back to January 2016. We have noted the sharp upward movement in the past couple of weeks. This has been driven by fundamentals. Japan is one of the largest energy importers in the world, meaning that the higher commodity prices caused by the war in Ukraine is going to provide cost-push inflation to the country.

Further, we are also seeing a stronger USD, as safe haven flows head into the greenback given the uncertain backdrop.

Although we note the validity of these reasons, we think that the technical picture will start to hamper gains. The 2016 resistance level should offer a tricky test for the already overbought pair to take out in the short term.

The weekly RSI (relative strength index) is the highest since the end of 2014. We’ve also seen a several sigma move outside of the Bollinger bands, which suggest a mean reversal is due.

We intend to hold this position for several days, waiting for a pullback to exit. A sustained break above 121.65/70 would cause us to rethink and close out the position.