USD / JPY retests daily highs as US yields rise.

• Rising US yields following Monday’s vaccine news prop up USD / JPY, with eyes on movements in the US bond market.
• USD / JPY remains near its 50-day SMA, at 105.26 for now.

The USD / JPY remains supported above the lows of the previous day, supported by increased selling pressure in the US government bond market. which has seen proof of the five-month highs in the US 10-year bond yield (T-note) at 0.96%. At the time of writing, the pair is trading slightly lower, roughly 0.1% or less than 10 pips.

Sooner-than-expected economic reopening narrative keeps USD / JPY supported

Many market participants praised the positive news about yesterday’s vaccines, from Pfizer and BioNTech, as a game changer in the global fight against Covid-19, given that their vaccine has been shown to be 90% effective in preventing virus infection. Other major vaccine developers are using similar technology, so More vaccine developers are expected to announce positive results in the coming weeks.

Markets are therefore in the process of positioning themselves for faster and more effective vaccination of the population than had been anticipated, especially in developed countries, many of which had already placed large orders for the Pfizer / BioNTech vaccine. . Thus, Global growth expectations for 2021 have received a boost as hopes for an earlier-than-expected reopening rise.

This has weighed on the demand for safe haven assets like the JPY, and investors are rushing to invest in assets with higher perceived risk and higher yields, such as stocks and emerging currencies, which are now expected to perform better in 2021. The EUR / JPY, the GBP / JPY, the CAD / JPY and AUD / JPY rose on Monday and continue to trade at or near multi-month highs.

Meanwhile, USD / JPY also rose on Monday, despite investors also viewing the USD as a safe haven currency. The main factor that pushed the USD / JPY higher was instead a significant increase in the advantage of the US rate over the assets of Japan, by comparing the yields of US government bonds with Japanese government bonds.

The BoJ has implemented a policy to control the yield curve which maintains the yield on the Japanese 10-year government bond capped at “around 0%” and, since its implementation in 2016, yields on the Japanese 10-year bond have rarely exceeded 0.1%. While Japanese bonds were largely undaunted, Monday’s vaccine news sparked a surprising increase of more than 0.15% in US 10-year bond yields to highs of 0.963%, prompting investors to ditching Japanese bonds and flooding US bonds (positive for USD / JPY).

During the Asian session on Tuesday, the US 10-year yield fell to lows below 0.92%, coinciding with the fall of the USD / JPY briefly below 105.00. However, US bond yields have rebounded again, with US 10-year yields back near Monday’s highs of around 0.96%. Hence, USD / JPY has rallied above 105.00 and targets Monday highs above 105.50.

Looking ahead, it seems that Bond market dynamics will continue to play a major role in driving USD / JPY price action. Given the latest news on the vaccine front, as well as the election of Biden, which should foster better global growth and more predictable trade relationships, the Federal Reserve could struggle to justify more QE in 2021, something that could facilitate increased rise in US bond yields, further supporting USD / JPY.

However, Covid-19 infection rates in the US are currently on an alarming trajectory, with the highest hospitalizations right now as at any time during the pandemic thus far, meaning the Fed could be excused for taking a more cautious short-term perspective. This, combined with the recent surge in US bond yields, which could alarm the central bank that is trying to keep borrowing costs low to foster recovery, could be enough for the Fed to decide that more QE is needed. in the short term. This could be negative for USD / JPY.

USD / JPY capped by its 50-day SMA for now

Since rebounding from Monday night lows below 105.00, USD / JPY has been more moderate for the past few hours, with the pair hovering near its 50-day moving average at 105.26.

On the downside, there is the 21-day SMA at 104.78, which appeared to have acted as strong support overnight (the Asian session low was 104.82). To the upside, it is Monday’s high at 105.65 and above October 20’s high at 105.71.