It’s fascinating when thinking of what to write each week that sometimes, the topic “du jour” is staring right at you. In this case, our daily routine includes what currencies are the best and worst performers of the year. In top place of course is the Aussie which has been top of the charts for some time. But coming in at number two, is the yen. We discussed this pair last week and how it could point to market direction if it could break through strong multi-year resistance.
We know for this week at least, that equity markets and sentiment have dimmed as safe haven currencies have strengthened. US stocks recorded the first 1% decline for 109 trading days, the biggest drop since October 11. Similarly major commodities are weaker in a classic ‘risk off’ move.
There has been no precise catalyst to this quite sudden change in the market. Impatience with the new Administration’s fiscal plans is one reason as the delay in President Trump’s healthcare plans has scared investors into thinking that other potential fiscal measures will be delayed as well. There is also the potential political risk associated with the investigation into Trump’s ties with Russia being investigated.
Whatever the fundamental reasons, it is also worth remembering that USD/JPY remains closely correlated to US Treasury Yields. In which light, the current environment has seen bond yields sell off by more than 20 basis points since last week’s Fed in the case of the US 10 year.
USD/JPY and US 10 Year Yield (Source: Bloomberg)
For the time being then, the market is in correction mode and the safe haven JPY is showing strong relative strength across the board, hitting fresh 2017 highs last seen in November. We can see on the chart that USD/JPY posted a high of 118.18 around mid-December. The pair then fluctuated in a wide 111-115 range and failed to hold above 115.00 resistance last week.
We can also see that US yields rallied strongly towards the end of last month and into March as FOMC members ratcheted up their upbeat hike rhetoric. However, from this high of 2.63% hit after the ‘dovish hike’, yields have retraced.
Today 111.79/36 support zone has been breached in USD/JPY and key will be whether prices can hold down below this key support. It is interesting to remember that most forecasts for higher US interest rates are actually not contingent on fiscal stimulus. Indeed, Chair Yellen has stressed that any possible fiscal measures have not been factored in to the Fed’s outlook. We have not had more than 7 consecutive down days in many years so a bounce and consolidation in yield and USD/JPY should be expected.