Japanese Yen Scoping 150 Plus as US Dollar Consolidates. Higher USD/JPY?

Japanese Yen, USD/JPY, US Dollar, JGB, Treasury Yields, BoJ, – Talking Points

• The Japanese Yen is looking at potential new lows against USD
• JGB yields have moved higher, but Treasury yields have done more lifting
• The BoJ meets later this month. If they modify policy, will USD/JPY rally?

USD/JPY is nervously nudging toward 150 with markets wary of potential intervention from the Bank of Japan (BoJ) should the Yen rapidly weaken.

The US Dollar has been clocking up the gains against most currencies this week with Treasury yields racing to new heights, particularly in the back end of the curve.

These moves have seen the closely watched 2s 10s yield curve become less inverted in what is referred to as a bear steepening. It is called this due to the capital loss seen on the 10-year bond as its yield goes higher.

At the same time, Japanese Government Bond (JGB) yields have also edged up, testing the bandwidth that the BoJ will allow as they try to maintain yield curve control, albeit with some flexibility.

10-year JGBs nudged 0.86% overnight and remain near there going into Friday’s trading session, the highest yield on the bond since 2013.

At the same time, the 10-year Treasury note eclipsed 5.00% yesterday and has out-accelerated the JGB yield increase, potentially further underpinning USD/JPY as illustrated in the chart below.

USD/JPY AND JP-US 10-YEAR BOND SPREAD

Chart created in TradingView

The BoJ will hold its monetary policy meeting on October 31st and the market is speculating on further tightening.

The BoJ has a policy rate of -0.10% and is maintaining yield curve control (YCC) by targeting a non-specific band around zero for Japanese Government Bonds (JGBs) out to 10 years.

The band was previously of +/- 0.50% before the bank changed tack and introduced some flexibility.

Many market participants are looking toward a possible shift in YCC but the zero interest rate policy might also come under the microscope after comments by a former board member at the BoJ, Makoto Sakurai on Thursday.

He said that he thinks that the bank is more likely to abandon negative interest rates before any further adjustments to YCC.

Mr Sakurai noted last year that the bank might loosen YCC controls months before the BoJ adjusted it.

In any case, the yield differential appears to be supportive of USD/JPY for now, but the question remains, will the BoJ sell USD/JPY if it breaks higher?

USD/JPY TECHNICAL ANALYSIS UPDATE

USD/JPY is inching closer to the 12-month high seen earlier this month at 150.16. A break above there could see a run toward the 33-year peak seen at this time last year at 151.95.

A bullish triple moving average (TMA) formation requires the price to be above the short-term SMA, the latter to be above the medium-term SMA and the medium-term SMA to be above the long-term SMA. All SMAs also need to have a positive gradient.

When looking at any combination of the 10-, 21-, 34-, 55-, 100- and 200-day SMAs, the criteria for a TMA have been met and might suggest that bullish momentum is evolving. For more information on trend trading, click on the banner below.

On the downside, support may lie at the recent lows near 147.30 and 145.90 or further down at the breakpoints in the 145.05 – 145.10 area ahead of the prior lows near 144.50 and 141.50.

Chart created in TradingView

— Written by Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel via @DanMcCarthyFX on Twitter