The Yield Spread Albatross Around USD/JPY's Neck
June 4, 2019 2:21 PM
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, FOREX.com.
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.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.