USD/JPY drops - Profit taking or hedge demand for JPY?

Failure to hold above 114.00 handle in early Asia has proved to be a costly exercise for the bulls as USD/JPY is now fast losing height.

Currently, the pair is trading at 113.76, having clocked a session low of 113.73.

Profit taking/Sell the fact underway?

The decline from the high of 114.10 could be due to profit taking on the JPY short initiated ahead of Sunday's Japanese elections. Moreover, the majority of the financial markets had already seemingly priced in the victory.

Hedge demand for JPY?

An argument could be put forward that the decline from the session high of 114.10 is due to increased demand for the JPY, courtesy of cold war like situation between the US and N. Korea and worsening of the political crisis in Spain.

However, the odds are low that the fresh bids are pushing the Yen higher as there no signs of risk-off in the equity markets. The decline appears to be led by unwinding of Yen shorts/Sell the fact trade.

USD/JPY Technical Levels

Jim Langlands from FX Charts writes, "US$Jpy finally took out the recent highs on Friday and traded up to 113.56 and now, having broken decent downtrend resistance, looks capable of heading higher. There is not a lot of resistance ahead of 114.00, above which there is again very little to be seen until 114.50.On the downside, minor support today should arrive at 113.20/00 below which 112.80 and Friday’s low of 112.50 should provide decent backup. Below there, the 19 Oct low at 112.30, and the 18 Oct low at 112.12 would attract. Looking for levels to buy dollar again seems to be the plan but the market is already short of Yen and so caution is warranted as any need for safe haven demand could see some very quick and painful dips."