USD/JPY Caught in the Crossfire as Trump’s Tariff Shock Roils Markets

• USD/JPY correlation with front-end rates strengthens dramatically
• Trade war shock adds fuel to recession speculation
• CPI, Fed speak likely to take back seat to headlines and price signals
• Bearish techs remain dominant, but bulls show signs of life
• Monday’s Asia open important for directional risks

Summary

USD/JPY has essentially become a market instrument to bet on U.S. recession probability, demonstrating an increasingly strong correlation with U.S. Treasury yields and riskier asset classes tied to the economic cycle.

Given the latest bout of economic angst has been driven by a dramatic shift in U.S. trade policy — and how other nations may respond to it — rather than solid evidence of an impending downturn, it puts increased emphasis on headlines and price signals for guidance on USD/JPY directional risks.

For now, selling rallies is favoured over buying dips, but don’t be wedded to the view if circumstances change. It’s an environment where being nimble and selective may increase your odds of success.

USD/JPY Reflects U.S. Recession Risk

After a period of being heavily influenced by riskier assets earlier this year, USD/JPY’s relationship with U.S. interest rates has strengthened dramatically over the past fortnight, especially at the immediate front-end of the yield curve. You can see that with its correlation coefficient score with 2025 Fed rate cut pricing based on futures markets, sitting at 0.91.

Source: TradingView

While not as robust as Fed pricing, the relationship between USD/JPY and U.S. Treasury yields further out the curve — along with measures of expected U.S. stock and bond market volatility — has also strengthened noticeably over the same period.

Even though it’s not unusual for USD/JPY to be strongly correlated with rates and riskier assets, given the latter two have been heavily impacted by souring investor sentiment towards the outlook for the U.S. economy recently, it suggests USD/JPY is essentially behaving as a U.S. recession barometer in early April.

Data, Events Calendar Takes Rare Back Seat

In normal circumstances, the focus would be on economic data to evaluate the likely response from fiscal and monetary policymakers. But these are not normal circumstances. What we witnessed last week from the Trump Administration was deliberate and by design, delivering reciprocal tariff rates that were larger and calculated based on deficit size rather than trade barriers.

The approach was not flagged anywhere beforehand, ensuring maximum confusion. If that can happen one week, who’s to say another rabbit won’t be pulled out of the hat the next? While Trump is likely to keep the assigned tariffs in place so he can start raising revenue to pay for tax cuts flagged during his Presidential campaign, no one can say definitively that the stance won’t change abruptly in the days ahead. The trade war could even escalate further if Trump follows through with the threat to retaliate to any retaliation, as we’ve already seen announced from China and Canada.

The implication of the uncertainty-by-design is that known risk events, such as economic data and central bank speeches, will likely be a distant secondary consideration this week. The calendar below shows the key data releases in the U.S. and Japan, headlined by U.S. consumer price inflation on Thursday.

Source: Refinitiv (All Times U.S. East Coast)

Normally, the CPI report is arguably among the top two U.S. data releases every month, along with nonfarm payrolls. But this information is old news. So too are the producer price inflation report and inflation expectations in the University of Michigan consumer confidence report 24 hours later. The U.S. tariff increases that began over the weekend — and will expand to around 60 other nations on April 9 — have destroyed any signal these reports may have offered. Even so, hot readings could still cause some further carnage in risk assets, limiting the potential for the Fed to begin lowering interest rates given tariffs will see inflationary pressures reaccelerate, at least in the short term.

The central bank speakers’ calendar for the U.S. and Japan is found below. Look out for any unscheduled appearances throughout the week, although it’s debatable just how much influence they may have given they’re dealing with the same heightened level of uncertainty as we are.

Source: Refinitiv

It’s more a point of interest than something that could meaningfully shift USD/JPY, but scheduled auctions for U.S. three-, 10- and 30-year Treasuries will contain information on indirect bids, providing a snapshot of foreign demand. If very weak relative to levels seen in prior auctions, it could accelerate the decline in the U.S. dollar seen last week. 

Source: Refinitiv

Rates Reversal Noteworthy

Considering the increasing correlation between USD/JPY and U.S. Treasury yields over the past fortnight, it’s worth taking a quick look at the technical picture for U.S. 10-year Treasury note futures, especially given the price action seen on Friday.

The shooting star candle that printed provides a signal that we may have seen a near-term top, especially as it was underpinned by huge turnover not usually witnessed outside contract rolls. While the price action may reflect hedging to guard against headline risk over the weekend, it’s something to note given the recessionary panic witnessed in other asset classes.

Given we’re talking about the long-end of the curve, rather than the front-end that’s influenced by Fed expectations, the argument that the move was driven by the payrolls report or Powell’s speech on Friday does not stack up.

Source: TradingView

For now, momentum indicators like RSI (14) and MACD are providing strong bullish signals even though the former has crept into overbought territory. And the price did manage to close above 116’11’0 on Friday, a level that acted as support and resistance for periods last year. Combined, the signals favour buying dips over selling rips, which implies risks for yields are lower. But if we were to see a decent bearish candle print on Monday, it could signal recessionary fears are waning, so keep a close eye on the price action.

USD/JPY Technical Analysis

The 10-year note futures chart was deliberately inserted above because the price action in the Japanese yen was almost identical against the U.S. dollar on Friday, with a huge bullish reversal taking place in USD/JPY after earlier falling to fresh multi-month lows. Again, it’s too early to tell whether this was a result of weekend hedging activity or the start of a potential trend reversal, so pay close attention to the price action in Asia on Monday.

Source: TradingView

Levels of note on the topside include 147.10, 148.65, the 50-day moving average, and 151.00. To get towards either of the latter two, it would likely take a dramatic positive shift in the U.S. economic outlook.

On the downside, 144.50 should be in focus considering the price bounced strongly from the level on Friday. If it were to give way, bids may be encountered at 143.00, 141.75 and 139.60. If the latter were to be reached, it would indicate amplified fears about the U.S. economy.

RSI (14) continues to trend lower and is not yet oversold. MACD has also crossed over from above below zero, confirming the bearish momentum signal. That favours selling rips and bearish breaks, but be prepared to flip the bias if the price action delivers a definitive bullish signal.

-- Written by David Scutt

Follow David on Twitter @scutty