USDJPY and Japanese bond yields

USDJPY has managed to claw back recent losses today as it has followed the Nikkei (the Japanese stock market) higher and been given a boost by a better than expected reading of US consumer confidence, which rose in May to its highest level for 5 years.

However, lurking in the background are Japanese bond yields, which have continued to rise today and the 10-year yield is back above 0.9%, which is close to the highest level for a year. Usually rising bond yields mean a strengthening currency, but not so for the yen. As yields have been rising, the yen has sold off.

A quick analysis shows that bond yields fell while USDJPY rose for the first three months of this year, but things changed in April 2013, which coincided with the BOJ’s stimulus programme, and yields started to rise alongside USDJPY.

But is this unusual? To answer this we have performed a brief analysis on USDJPY and 10-year Japanese bond yields over the last 5 years.

• Back in March 2012, USDJPY rose to its highest level for 12 months, while bond yields had a mini spike to 1.05%.

• USDJPY spiked in March 2011 when the 10-year bond yield reached a 1.36% high.

• USDJPY rallied between March and August 2008, at the same time as the 10-year yield rose above 1.8%.

Summing up, in the recent past USDJPY has managed to sustain gains when yields have been much higher than their current level of 0.9%. This suggests that USDJPY may be able to eke out further gains even though Japanese bond yields are rising, potentially for another 50 or so basis points.

This may sound counter-intuitive, but yields may be rising because of expectations that the BOJ stimulus is working and will boost inflation further down the road, while the unprecedented level of stimulus from the Bank is weighing on JPY.

Thus, although the pace of gains in Japanese bond yields is worrying, they are still some way from becoming problematic for USDJPY, in our view.

Some levels to watch:

Support: 101.95 (daily pivot) then 101.40 and 100.85.

Resistance: 102.55, 102.90, 103.57 – intra-day high from 23rd May.

Source: Forex.com

28.05.2013