- USD / JPY rallied Monday to above 113.00 from just above 1.1300.
- The rebound is hand in hand with a rise in long-term US yields, although USD / JPY remains well below last week’s highs.
The USD/JPY has seen a solid rebound on Monday, bouncing from the previous session lows (and last week) around 113.00 to session highs above 113.00, where it continues to trade mid-session from US One. Brief dip below the 50-day moving average, which is currently at 113.13, earlier in the day was used as an opportunity to buy on the dips. However, for now, the selling pressure above the important psychological level of 114.00 and the 20 DMA just above it is preventing further gains. Therefore, while the pair is trading higher at approximately 0.4%, USD / JPY remains approximately 1.5% below last week’s highs around 115.50.
The main reason for the pair’s rally on Monday, as well as the main reason it still remains below recent highs, has to do with its close correlation with US bond yields. The 10-year yield has rebounded well since hitting its 200 WAD at 1.48% last Friday and trading well above 1.50% on Monday. But at 1.525%, that still leaves it about 16 basis points below last week’s pre-Omicron highs, just shy of 1.70%. Recall that market sentiment took a sharp turn on Friday as fears arose about the recently discovered highly transmissible and potentially vaccine-resistant variant of Omicron Covid-19. That sent markets back aggressively on their rate hike bets from the Fed, encouraging investors to hoard bonds for their safe-haven properties, as well as the expectation of a drop longer.
Markets have been somewhat reluctant to rebuild these Fed bullish expectations on Monday, despite riskier market tone and early signs in South Africa that new variant sufferers (so far) are showing mild symptoms. The implied return of the December 2022 Eurodollar future (an indicator of where markets think the Fed funds rate will be) stood at around 0.9% on Monday, having fallen from its highs. pre-Omicron around 1.08% last week.
Caution makes sense. Fed Chairman Jerome Powell is scheduled to speak at 20:00 GMT. Then the rest of the week is packed with Fed-related risk events such as many more Fed speeches (including a two-day testimony in which Powell appears before Congress given his recent appointment) and data from US employment and ISM as is often the case, USD / JPY has not responded to Japanese national news. Japan will reportedly ban all foreigners from entering by the end of the month. Meanwhile, October retail sales data was in line with expectations and showed a slow year-on-year growth rate.
Technical levels
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