USD/JPY inter-market: Yen remains in demand despite of improvement in risk appetite

Following a drop to 103.55 on Thursday, marking its lowest level since August 2014, the USD/JPY major attempted a recovery and extended the momentum to test 104.80 region during Tokyo opening session. 

The recovery met with fresh supply and the pair once again dropped back to 104.00 handle. The pair, however, has managed to hold its neck above 104.00 handle.

Meanwhile, the latest leg of fall in the USD/JPY major, below 106.00 level, was despite of improving global risk appetite, as depicted by a drop in the Volatility index (VIX). The global risk-on sentiment was further supported by a tepid recovery in the US and Japanese 10-year bond yields.

Hence, the ongoing weakness is irrespective of the intrinsic and has been driven independently on the back of dovish Fed statement and BoJ inaction. The Japanese Yen, however, has gained traction on safe-haven flows amid uncertainty surrounding the crucial UK-EU referendum, popularly termed as 'Brexit'.

Given that the pair has already weakened in excess of 700-pips in last three weeks from late May high level of 111.45, traders might be inclined to book profits and cover their short positions. This might eventually trigger a sharp short-covering rally May lows support break-point turned immediate strong resistance near 105.50 region.