Japanese Yen Soars, Sending USD/JPY Lower as Treasury Yields Soften Before CPI

Japanese Yen, USD/JPY, Bond Yields, Technical Analysis – Asia Pacific Briefing:

• Japanese Yen See strong two-day gains vs U.S. dollar
• US dollar / Japanese yenThe decline coincided with the decline in US Treasury bond yields
• The exchange rate broke below the main exponential trend line

The Japanese Yen has outperformed its major counterparts, especially against the US Dollar. Over the past two days, the USD/JPY has fallen around 1.9 percent during its worst performance since May. Beyond that, was the move Quite a rare event. If we look at the data since the beginning of 2000, the decline of 1.9% is -2.2 standard deviations from the mean.

A closer look at the yen’s price action over the past 24 hours reveals that the currency’s strength has coincided with weakness in long-term US yields. The 10-year Treasury yield fell nearly -1.8%, the worst performance since June 20th. This was despite a slew of Fed speakers where policy makers reiterated that the likely scenario in the future is higher interest rates and possibly for a longer period as well.

Traders may have been preparing for this week’s US inflation report. On Wednesday, headline inflation is expected to slow more than 4.0% yoy in May to 3.1% yoy in June. However, this is largely due to declining inflation in food and energy prices. The less volatile core reading is seen as down to 5.0% yoy from 5.3% previously.

This is not good news for the Fed as it may indicate that core inflation is becoming more entrenched and more stable to deal with. Investors may be looking forward to softer printing and possibly to a less hawkish Fed. This may benefit the Japanese yen as its fundamentals are linked to external factors due to the recession of the Bank of Japan. As such, USD/JPY is very sensitive to Treasury yields.

Technical analysis of the Japanese yen

The decline in USD/JPY over the past two days has seen the exchange rate confirm a break-down on what has been an increasingly faster uptrend since the beginning of this year – see chart below. This revealed an immediate support, which is the 23.6% Fibonacci retracement level at 140.85. Beyond that sits the 50-day simple moving average. The latter could continue, while maintaining a broader bullish focus.

USD/JPY daily chart

Chart created in TradingView

– By Daniel Dubrovsky, Chief Strategist for DailyFX.com