Trading Currencies: The USD/JPY ‘Bond’ Remains so Attractive

In the world of trading, the saying ‘the trend is your friend’ has always been a good base for a trade. However, what is even more beneficial to a trade is a fundamental correlation such as that between USD/JPY and US bond yield. Adding to this is the trader’s mantra of staying with one product and it makes for a strong case to hold the course.

Over the last few weeks, we have continuously highlighted the correlation between USD/JPY and US bonds and that is unlikely to change any time soon as we stick to the descriptions in the opening paragraphs for trading with trends, correlations and single products.

US Yields Hit New Highs

US treasury yields climbed to new highs this week before quickly giving back all gains. This has been attributed to investors preparing for the announcement on President Biden’s new $4trn spending package – but whatever the package is, the conclusion is likely to be the same: medium-term inflation, which will push long-dated yield higher and higher still. Ten-year yields hit 1.77% on Tuesday before falling back down to 1.70% – but the trend suggests 2% is only a matter of time now, as reflected from the rising breakeven inflation rate which is at the 2.36% level.

USD continues to make broad-based gains. EUR/USD which was chasing $1.22 in a mere 14 days ago is now at $1.1712 – a five-month low. The AUD/USD is struggling to hold the $0.76 handle and is back below at $0.759 and looking weak.

But it’s USD/JPY that needs the most attention having now pierced through ¥110.00 for the first time since March 2020. After its several attempts, we see a new set of targets being created. The breakdown of a clear resistance line at ¥110 will have the technical analysts excited and they will be looking for confirmation that it will break for real over the coming days. The pair topping out at ¥110.43 before the 7-basis-point slide back to 1.70% in the 10-year took some of the heat out.

But with the forecast of 2% in US long-dated bonds and a likely pop from the Biden announcement, USD/JPY’s correlation trend suggests further upside is likely over the coming period.

Coming events/holidays to watch out

• 2 April: Nonfarm Payrolls (March) – The Market expects the payrolls to rise for the third consecutive month to 647K (previous was 376K).
• 5 April: Easter Monday bank holiday in Australia, New Zealand, and Europe; Ching Ming Festival holiday in China.
• 8 April: The FOMC Minutes will be released.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.