USD/JPY breaks out as US bond yields extend gains
Fawad Razaqzada April 23, 2018 1:00 PM
Just a couple of weeks ago, the dollar was languishing in the doldrums. This was in part due to that disappointing US jobs report which helped to lower expectations for aggressive rate hikes from the Fed and partly because of trade war concerns. Well, since then, the markets’ expectations over short-term rate rises have been on the rise again as geopolitical tensions abated and incoming data has been mostly positive.
Just a couple of weeks ago, the dollar was languishing in the doldrums. This was in part due to that disappointing US jobs report which helped to lower expectations for aggressive rate hikes from the Fed and partly because of trade war concerns. Well, since then, the markets’ expectations over short-term rate rises have been on the rise again as geopolitical tensions abated and incoming data has been mostly positive. Investors now expect to see at least two and possibly three more rate increases before the year is out. This has been reflected in rising yields on the policy-sensitive 2-year Treasury, which is on the brink of touching 2.5%. The last time the two-year yield was this high was during the financial crisis back in 2008. This goes to show that Trump’s reflationary policies are clearly working, given that the yield on the two-year debt was around 0.86% when he was elected. Meanwhile the benchmark 10-year yields have also been on the rise, but at a slower pace. They find themselves at just shy of 3.0% again at the time of this writing. Consequently, the yield curve has flattened. In other words, investors’ required rate of return on lending to the government for the long term has fallen on a relative basis. This suggests that the market is probably thinking that the Fed will raise rates in the short term but then it will probably hold policy steady for a long period. It also implies investors might be concerned over the longer-term economic outlook.
But traders are short-sighted. They only care about short-term direction of prices. Given the rising short-term yields, the dollar has appreciated in recent days and now the Dollar Index is on the verge of a possible breakout. The dollar’s strength has helped to lift the USD/JPY above the key 107.30-108.05 area. This is a range which we had highlighted as resistance two weeks ago HERE. Now that price is trading above this area, the next question is can it hold here? If so, then we could see further gains in the days to come. The next bullish objective is at 108.50, the last support pre breakdown on the daily time frame. This level also happens to converge with the 38.2% Fibonacci retracement against the most recent swing high. If we eventually go above this level then the next objectives could be 109.70, the 50% retracement level, followed by 110.25, which marks the 200-day average. The long-term resistance is at around the 111.00 handle – this corresponding with the bearish trend line which can be seen on the weekly chart. Meanwhile in terms of support, the broken resistance levels at 108.05, 107.85 and 107.30 are all going to be the new potential supports to watch. It is worth remembering though that technically this is a correction in what is a long-term downtrend. So, if you see signs of a reversal again, then treat that signal with respect, regardless of today’s apparent breakout.
Source: eSignal and FOREX.com.
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.