Title: Yield Spread Breakdown Hints at Further Yen Strength Against USD
Original author: Kenny Fisher
The USD/JPY currency pair has recently shown signs of shifting momentum due to notable developments in the US-Japan yield spread. Investors and traders are now paying close attention to key economic indicators and bond yields that could significantly influence the trajectory of the yen in the near term.
For much of 2024, the Japanese yen has faced considerable weakness against the US dollar, driven largely by divergent monetary policy stances between the Federal Reserve and the Bank of Japan (BoJ). However, there are early signs hinting that this trend may be nearing a turning point.
Key Developments Supporting Yen Strength
Financial markets are currently influenced by several interlocking conditions that are beginning to favor the Japanese yen. Among the most prominent is the narrowing yield differential between US and Japanese government bonds.
– US-Japan Yield Spread Breakdown:
– Japanese yields, particularly the 10-year government bond, have shown steady increases.
– Meanwhile, US Treasury yields have moved lower, especially in shorter maturities.
– This convergence between US and Japanese yields reduces support for USD/JPY appreciation, as investors see less of a carry trade incentive.
– Market Sensitivity to Interest Rate Expectations:
– The Federal Reserve, while still cautious, has not ruled out holding rates steady for a prolonged period to combat sticky inflation.
– However, softer US inflation data and a slowdown in the labor market are sparking conversations about potential Fed rate cuts later in 2024.
– The resulting decline in US yields has weakened the dollar’s appeal relative to the yen.
– Bank of Japan’s Policy Tightening Signals:
– The BoJ has taken steps towards policy normalization after ending its negative interest rate regime earlier in the year.
– Governor Kazuo Ueda has signaled a gradual but clear departure from ultra-loose monetary policy.
– Rising wage pressures and inflation approaching the 2 percent target have fueled expectations of further BoJ rate hikes.
USD/JPY Technical Analysis
The technical landscape for the USD/JPY pair supports the macroeconomic narrative. The currency pair has recently pulled back from its highs, breaking down key support levels and potentially forming a reversal pattern.
– USD/JPY Price Trend:
– The pair peaked near 160.00 in late June before reversing course.
– Since then, a sustained downward movement has taken place, with the pair now trading around the 153.00–154.00 range.
– Technical indicators suggest bearish momentum gaining strength.
– Key Technical Levels:
– Immediate support lies near the 152.80 level, followed by more substantial support at 150.90.
– On the upside, resistance is expected near 155.10, and again at the former peak of 160.00.
– A confirmed break below 152.80 could trigger further yen gains, pushing the pair closer to the 150.00 handle.
– Chart Patterns:
– The daily chart has begun to form a head-and-shoulders pattern, often seen as a reversal formation.
– Additional bearish signals include declining Relative Strength Index (RSI) readings and weakening momentum indicators.
Fundamental Drivers Emphasizing Yen Resurgence
Beyond yields and technicals, broader economic factors also support a strengthening Japanese yen:
– Inflation Trends:
– Japan’s inflation has held above the BoJ’s 2 percent target for several consecutive months.
– Core CPI has shown resilience, dismissing earlier concerns over transitory price pressures.
– This has further validated the BoJ’s cautious tightening stance and justification for ending negative interest rates.
– Labor Market and Wage Growth:
– Japan has recently recorded significant wage increases, exceeding market forecasts.
– Annual wage negotiations resulted in some of the highest pay hikes in decades, supporting domestic demand.
– Higher wages promote a positive feedback loop for inflation, encouraging the BoJ to stay on the tightening path.
Explore this further here: USD/JPY trading.