- USD / JPY has rallied to the top of the 108.30 – 109.20 range of the last three weeks.
- More hike in US bond yields is likely to be needed to push the pair to new yearly highs.
The USD/JPY It has rebounded toward the top of the 108.30-109.20 range (roughly) that has been in play for most of the last three weeks on Thursday. Currently, the pair is stabilizing around 109.15, rising just over 40 pips or around 0.4% on the session.
Performance of the day
The JPY is among the worst performing currencies in the G10 on Thursday, down about 0.4% on the session against the US dollar, with similarly sized losses for the EUR, CAD and CHF. No fundamental catalyst or specific news can be pointed out to affect the yen on Thursday. Meanwhile, US bond markets were mixed, with yields still substantially lower on the week (in other words, USD / JPY is not getting the boost from US rate spreads, rather , the currency seems to be falling victim to a USD that seems to want to break higher; Thursday’s rally in the DXY has taken it above its 200 DMA for the first time since the end of May.
The recipe for USD / JPY to break higher
109.25-109.35 is a key resistance area for USD / JPY that failed to break north on Thursday. The fact that USD / JPY has remained locked within recent ranges and failed to hit new yearly highs this week is not much of a surprise given that 1) The pair has already advanced a lot this month, rising from below 107.00 and 2) interest rate differentials between the United States and Japan, a key factor in the recent rally, have narrowed this week as US bond yields have come under pressure.
However, with prices consolidating in recent weeks, the bulls will have caught their breath for the next bullish momentum. All that will be needed is a further widening of the US-Japan rate spreads or, in other words, a further improvement in US government bond yields.
Things are still looking pretty positive in the US; The vaccine launch is going well, and US President Joe Biden announced at Thursday’s press conference that the new goal for his first 100 days in office is to deliver doses of 200 million vaccines after the 100 million target will be easily overshadowed. Meanwhile, this week’s economic data (survey data anyway) shows that the US economic recovery is on track and Fed officials, while still admitting that there is a long way to go to a full economic recovery, they sound quite optimistic about the US economy in 2021, with some even talking about increases in 2022 and 2023.
A Fed official even expressed surprise that bond yields are not actually higher than they currently are. Since the economic outlook is so optimistic, risks seem to lean towards higher returns (bullish for USD / JPY), despite the recent pullback. Meanwhile, this narrative of optimism in the US comes at a time when much of the rest of the world is turning increasingly pessimistic (the EU returns to lockdown amid the third wave of viruses, now is affecting key emerging market economies). The US outperformance versus the world is typically USD positive, one more reason to be long USD / JPY.
Technical levels
.
Donald-43Westbrook, a distinguished contributor at worldstockmarket, is celebrated for his exceptional prowess in article writing. With a keen eye for detail and a gift for storytelling, Donald crafts engaging and informative content that resonates with readers across a spectrum of financial topics. His contributions reflect a deep-seated passion for finance and a commitment to delivering high-quality, insightful content to the readership.
