- Yields continue to drive USD/JPY higher as US-Japan spreads widen
- 153.38 resistance under threat; break could open the door to 154.00 and beyond
- US CPI is the next major test, with a hot reading likely to strengthen the bullish case
Summary
Shifting directional risks for US Treasury yields have changed the picture for USD/JPY this week, with widening yield differentials between the United States and Japan aligning with technicals to spark what’s quickly becoming a new bullish trend.
Unless today's US consumer price inflation (CPI) report for January undershoots expectations—or we see a reversal in the recent backup in longer-dated US Treasury yields, which seems unlikely without a catalyst given the large pipeline of new debt issuance—the path of least resistance looks higher in the near term.
Treasuries Tilt Bearish
Whether you pin it on the threat of an escalating trade war and its inflationary side effects, Jerome Powell suggesting neutral policy rates have “risen meaningfully” relative to pre-pandemic levels, abundant new debt supply—including a 10-year US Treasury auction later Wednesday—or other factors, US Treasury yields have seen a distinctly hawkish push higher this week.
Benchmark yields have lifted around 14bp from last Thursday’s low, helping drive a similar widening in 10-year yield differentials between the US and Japan.
Source: TradingView
As discussed in an earlier gold post, the technical picture for US 10-year Treasury futures has shifted from bullish to borderline bearish over the past week. A failure at the intersection of uptrend and horizontal resistance last week may have contributed to an unwind, leaving prices teetering on an important technical level. If it gives way, lower futures prices mean higher US Treasury yields.
Source: TradingView
That’s key for USD/JPY with the pair showing an increasingly strong correlation with 10-year US-Japan yield differentials over the past month. At 0.93, the correlation coefficient suggests yield differentials remain in the driver’s seat.
USD/JPY Reversal Gathers Pace
Source: TradingView
Unsurprisingly, as yield spreads have widened, last week’s downside push in USD/JPY has not only stalled but reversed sharply. The pair is now threatening to break cleanly above horizontal resistance at 153.38, having already cleared the 200-day moving average earlier in the session.
The downtrend in RSI (14) seen for much of the year has been obliterated. While not yet confirmed by MACD, momentum—like price action—is shifting bullish.
Price action around 153.38 may be pivotal heading into the US inflation report. A break increases the probability of a push toward 154.00, a level where bids were parked in late January before last week’s bearish break. It could now revert to resistance. The 50-day moving average and resistance above 156.50 are other levels to watch. If 153.38 fails to break convincingly, support may emerge at the 200-day moving average and again at 151.00.
As for the US inflation report later Wednesday, the core measure is key. It’s expected to rise 0.3% in January. A hotter print could strengthen USD/JPY’s bullish case, while a soft reading may open the door for a pullback.