FX Update: USDJPY Upside Risk If Bond Yields Continue Higher

A rather quiet Monday yesterday, save for further fireworks in GBP to the upside and NZD to the downside, making the GBPNZD pair an odd focus as a monumental upside-down head and shoulders pattern neckline near 2.1000/50 was broken yesterday and will now be the support on retracements.

I would prefer to keep the focus on NZDUSD and whether that pair suffers further downside pressure toward the sub-0.7200 lows for the cycle and beyond.

The EuroGroup meeting yesterday produced nothing new on Greece’s drawn out negotiations with its creditors, and the market seems to be taking this in its stride, as EURCHF has continued to dribble higher and Greek and EU peripheral yield spreads traded indifferently over the news flow.

The key happening in markets at the moment is occurring very much away from FX, in the form of another bad day for government bonds. US treasuries were sold off heavily again yesterday, in what looks like a confirmation of yields at the long end of the US yield curve rising above the 200-day moving averages and at new highs for 2015 for the 10-year yield, currently around 2.30%, where there is now a descending trend-line under pressure.

This development and the shock rise in German sovereign yields are so against the general market narrative that they should really demand our attention. In particular, what does this rise mean for currencies and for risk appetite?

If the latter is scared by these still modest rises in yield, then it looks somewhat yen supportive, but if risk appetite is able to deal with higher yields from here, the pressure would seem very much on the upside for USDJPY, which has a tendency to correlate with US rates.

Chart: USDJPY vs. 10-year yields

USDJPY has been stuck in a range for a seeming eternity, but if US yields continue to rise, it may put further pressure on an upside break. All traders should have one eye on bond markets here. The below chart from Bloomberg shows the US 10-year yields (yellow) and USDJPY (white).