Dollar / yen rose to its highest level since October 2007 today, topping 116 at one level. It has been a remarkable rally for the dollar, since the October 31 announcement by the Bank of Japan that it would increase its already substantial monetary stimulus. Dollar / yen rose from 109 to 116 in the ensuing period.
On the upside, if the dollar’s bullish move continues, it could challenge the 123.50-124 highs of 2007. The 120 level could present some resistance due to its psychological significance.
Looking at the chart, the recent dollar upmove is clearly overextended. Both the 14-day relative strength index at 78 as well as the very positive MACD reading, signal extreme overbought conditions. Even dollar bulls should want a period of consolidation or correction before the dollar heads higher again, in order to correct this ‘overextension’.
Should the pair head lower, the previous high of 109.88 could act as a support level. Price action is also very far from its 200-day moving average at 103.88.
To sum up, the dollar’s up-move against the yen is strongly bullish for the greenback but because of the very violent moves higher recently and the extreme overbought signals, there should be significant volatility in trading this pair.