Given the present high correlation between USD/JPY and US 10-Year Yields, whichever direction yields move should bring USD/JPY with them!
This week be an occasion packed week for the US Dollar. Not only will the US be releasing important monthly economic data like durables Orders and Core PCE, but there are other important issues for the US Dollar to observe also . First of which can be the developments regarding last week’s FOMC rate of interest Decision meeting. Members noted that moderation in bond buying may soon be warranted. Powell went further during his news conference by saying that he feels goals are met to taper which tapering might be finished by mid-2022. This sent the US Dollar and US yields higher.
On Tuesday, both Fed Chairman Powell and Treasury Secretary Yellen will testify ahead of the Senate Banking Committee. In US politics, Democrats and Republicans are going to be fighting in the week over the infrastructure package, raising the US debt limit , and therefore the possibility of a government shutdown. Democrats have suggested a stopgap measure to increase it until December. this is able to give them longer to work out a long-term plan. Thus far, Republicans have yet to reply.
Japan’s LDP will choose are going to be the new Prime Minister in the week . Taro Kono, who oversaw the vaccination rollout, appears to possess the whip hand . Kono is probably going to bring with him a JPY 30 trillion ($270 billion) fiscal stimulus package. additionally , Japan also will release Retail Sales and Industrial Production and Unemployment in the week , but the foremost important report are going to be the Tankan Large Manufacturers Index for Q3. In Q2, the index jumped from 5 to 14 amid improving sentiment thanks to the recovery from the pandemic. Expectations for Q3 are like that of Q2.
However, US interest rates are the most driver of USD/JPY recently. As we discussed within the Chart of the Week in last week’s Week Ahead piece, USD/JPY features a high correlation with 10-Year US Yields. On a Daily timeframe, the coefficient of correlation is +0.82. Readings above +0.80 or below -0.80 have strong correlations . So, for instance , if US 10-Year Yields move higher, supported the present correlation, so should USD/JPY. Notice that as yields are moving higher (having recently tested the 1.50 level) USD/JPY has broken above horizontal resistance at 110.92. subsequent resistance is at the Jul 2nd highs of 111.65.
On a 240-minute timeframe, the coefficient of correlation is even higher at +0.96! For reference, a reading of +1.00 may be a perfect direct correlation , meaning that USD/JPY and US 10-Year Yields move together 100% of the time. +0.96 is pretty close! If yields pullback, supported the present correlation, USD/JPY should pull back with them. Horizontal support sits at 110.47 then 110.08. Notice also that the RSI is in overbought territory, indicating USD/JPY could also be ready for a pullback.
So where does US 10-Year yields go from here? They began the week moving higher but saw a brick wall near the psychological round number resistance level of 1.50, horizontal resistance at 1.53 and therefore the 61.8% Fibonacci retracement level from the highs of March 30th to the lows of July 20th, at 1.582. If yields can break above, there’s horizontal resistance at 1.594 and 1.704 before the March 30th highs at 1.774. If yields do move higher, supported the correlation, is seems that USD/JPY will move with them. However, if they fail to interrupt about near term resistance, support is at 1.385 and therefore the August 17th lows at 1.217.
There are many events in the week that would affect USD/JPY, including important monthly economic data, the US debt limit debate, the US infrastructure spending bill, an impending United States government shutdown and a vote for a replacement PM in Japan. Keep an eye fixed on US yields. Given the present high correlation between USD/JPY and US 10-Year Yields, whichever direction yields move should bring USD/JPY with them!