BUZZ-COMMENT-USD/JPY downside extending lower, US yields focus

May 25 (Reuters) – USD/JPY dropped further Tuesday, falling through 126.95-127.05 near-term support to 126.37 on EBS and extending its retracement from this year’s two-decade high of 131.35. Although more declines are possible, many in Tokyo see such moves as retracements with the longer-term trend still higher.

Another push down in U.S. yields appears to be behind the latest USD/JPY swoon. Softer U.S. economic data nL2N2XG1FL, a sour risk mood, especially for social media stocks nL3N2XG284, and the near-term peaking of hawkish Federal Reserve expectations drove the drop in yields.

JPY also remains very over-sold, and quite a few stops are reported to have been taken out on the break below multi-low support at 126.95-127.05. More JPY shorts may need to be pared before USD/JPY nL2N2X203B and JPY crosses nL2N2XG01F return to longer-term uptrends.

Near-relentless demand from Japanese importers is helping to cushion the downside. This bloc saw upside hedges taken out from March as option barriers were cleared one by one from 117.00. With prices for a range of products much higher now and JPY significantly weaker, the need for USD and foreign currency will remain high.

Next major technical support is at the ascending 55-day moving average at 125.45 and also ascending daily Ichimoku cloud between 121.91-125.17. Key Fibonacci retracement levels are found at 124.52 (on the daily chart) and 120.36 (on the monthly chart). Previous comment nL2N2XC036.

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(Haruya Ida is a Reuters market analyst. The views expressed are his own. Editing by Sonali Desai)

((haruya.ida@thomsonreuters.com;))