The Yield Spread Albatross Around USD/JPY's Neck

While there are other factors at play, the current yield spread is more indicative of a USD/JPY rate near the December “flash crash” lows in the 105.00 range than the current level around 108.00...

In the past 24 hours, we’ve touched on potentially bullish setups in EUR/USD and AUD/USD, mirroring the potential topping pattern we’re seeing in the US dollar index itself. Continuing with that theme, USD/JPY looks increasingly susceptible to more downside even after Friday’s 130-pip dump.

The culprit, once again, is collapsing US yields. Short-term yield spreads are one of the strongest drivers of currency values. So far this year, Japanese 2-year yields have held steady in the -0.15% to -0.20% range for the past six months, meaning that the recent collapse in 2-year US treasury yields has decreased the US’s premium over Japan from above 3% in November just above 2% now.

Source: TradingView,

While there are other factors at play, the current yield spread is more indicative of a USD/JPY rate near the December “flash crash” lows in the 105.00 range than the current level around 108.00. In the immediate term, USD/JPY is showing a potential bullish divergence in its RSI indicator, suggesting we could see a short-term bounce this week if markets see even a modicum of positive (or even neutral) US news.

Given the rounded top pattern and strong anchor from a collapsing yield spread though, USD/JPY traders may look to sell any near-term bounces toward the 109.00 handle.

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