USD/JPY skyrockets to 133.21, the highest level since early 2002, as a rebound in the US Treasury yields joins fears of further widening of the monetary policy divergence between the Bank of Japan (BOJ) and the US Federal Reserve (Fed). In doing so, the yen pair rises for the fourth consecutive day despite witnessing headwinds the previous day.
The US 10-year Treasury bond yields rise 2.2 basis points (bps) to 2.99% after snapping a six-day downtrend the previous day.
It should be noted that the market’s consolidation of recent moves, amid a lack of major data/events, as well as risk-negative news from Ukraine seem to underpin the US dollar’s safe-haven demand and offers extra strength to the USD/JPY run-up.
While portraying the mood, the S&P 500 Futures print the first negative daily performance in three, down 0.15% around 4,150 at the latest.
Other than the pre-data/event anxiety, the BOJ’s sustained bias to keep monetary policy easy in contrast to the Fed’s policy tightening measures also propel the USD/JPY prices. On Tuesday, BOJ Governor Haruhiko Kuroda said, “Would proceed with exit strategy if 2% inflation target in sight but now is not that time.”
Elsewhere, fears of global recession and chatters surrounding optimism budget from the US try to challenge the USD/JPY prices. The growth fears escalate on a comment from World Bank (WB) President David Malpass who warned that faster-than-expected tightening could push some countries into a debt crisis similar to the one seen in the 1980s. Also exerting downside pressure on the bond coupons were comments from US Treasury Secretary Janet Yellen and hopes of faster economic recovery in China, both of which favor risk appetite. On Tuesday, US Treasury Secretary Yellen testified on the Fiscal Year 2023 Budget before the Senate Finance Committee while saying that the US economy faces challenges from “unacceptable levels of inflation”, as well as headwinds from supply chain snags. The policymaker added, “An appropriate budget is needed to complement Fed’s actions to tame inflation without harming the labor market.”
Earlier in the day, Japan’s final reading of Q1 2022 GDP improved to -0.1% versus -0.3% previous estimations while the Annualized figures also eased to -0.5% from -1.0% initial forecasts.
Looking forward, USD/JPY traders are likely to witness further upside amid strong yields and fears of further widening in the BOJ and the Fed policies. However, Friday’s US Consumer Price Index (CPI) for May appears crucial to watch for clear directions.
The 138.2% Fibonacci retracement of May’s downside, around 133.30, joins the overbought RSI to challenge the USD/JPY pair’s immediate upside, a break of which could direct the quote towards 2002’s yearly top near 135.20.
Alternatively, pullback moves remain elusive until staying beyond the previous resistance, near 131.30-40. Following that, a pullback towards the 61.8% Fibonacci retracement (Fibo.) level of 129.45 can’t be ruled out.
Forex Trade Analyst : Prasad kadri
The USD/JPY currency pair has traditionally had a close correlation with U.S. Treasuries. When interest rates head higher, Treasury bond prices go down, which lifts the U.S. dollar, strengthening USD/JPY prices.
A foreign exchange correlation is the connection between two currency pairs. There is a positive correlation when two pairs move in the same direction, a negative correlation when they move in opposite directions, and no correlation if the pairs move randomly with no detectable relationship.
You can trade on forex pair correlations by identifying which currency pairs have a positive or negative correlation to each other. In the conventional sense, you would open two of the same positions if the correlation was positive, or two opposing positions if the correlation was negative.
A good rule of thumb for traders new to the market is to focus on one or two currency pairs. Generally, traders will choose to trade the EUR/USD or USD/JPY because there is so much information and resources available about the underlying economies. Not surprisingly, these two pairs make up much of global daily volume.
The major currency pairs on the forex market are the EUR/USD, USD/JPY, GBP/USD, and USD/CHF. The four major currency pairs are some of the most actively traded pairs in the world, along with the so-called commodity currency pairs: USD/CAD, AUD/USD, and NZD/USD.
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