FX analysis – USDJPY – Yield differentials pushing this pair higher

USDJPY

The USDJPY is on the march higher again after a better than expected Non-Farm payroll figure on Friday saw sentiment shift hawkishly toward Fed monetary policy with Fed fund futures now pricing in a 70% chance of a 25bp hike at the FOMC May meeting, up from around a 50-50 split earlier in the week.

The policy divergence in the US and Japan and the subsequent yield differentials on their respective 10 year government bonds has been the main driver of this pair in the last 12 months. You can see the close relationship of this in the chart below. The black line is the difference between 10 year yields on US 10 years – Japanese 10 year years, the orange line, the USDJPY rate.

As the US yields increase their gap to their Japanese counterparts, the USDJPY will be pressured upwards as traders look for low risk carry trades. The Yen was also not helped recently by comments from the new incoming governor of the BoJ that indicated that any change to the current dovish policy was not imminent.

Key levels to watch

USDJPY has been forming a textbook uptrend since late March. With the upward trend line tested and holding as support on a handful of occasions, a resistance level of 133.85 has so far held any further upside, but is looking vulnerable.

Ways to trade this are

1, Playing the range, buying low at the trendline, selling high at the resistance level. Though whilst the uptrend is in place the more cautious approach would be to stick to buys.

2, Waiting for a break of these levels for the next push. The longer this takes, and the tighter the range gets the more explosive this move could be.

While economic announcements out of Japan are very light on the ground this week, The US will be releasing both CPI and PPI figures, how these inflation figures look will have a measurable effect on market sentiment towards Federal Reserve policy and will almost certainly see some big moves in the USD and rates markets, so the break of this range may come as early as tomorrow night.