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US Dollar Breakout Yet to Gather Shape - Here’s What Needs to Happen

By , Currency Strategist
16 May 2014 11:25 GMT

Talking Points:

- US yields continue to plunge at the long-end of the yield curve.

- Previous instances of US yield curve bull flattening have hurt the US Dollar, US stocks.

- USDJPY could be next domino to fall if yields don’t rebound.

The most surprising performance among asset classes this year has to be from sovereign bonds, specifically US Treasuries: after all, it was a near-certainty among economists that the Federal Reserve’s tapering of QE3 would reduce demand and send interest rates soaring. 2014 has produced anything but that case, and the US Dollar’s resiliency has been put to the test as a result.

US Dollar Breakout Yet to Gather Shape - Here's What Needs to Happen

In fact, the 10-year US Treasury Note yield has dropped to its lowest level since October 2013, in the wake of the US government shutdown:

Forex Technical Analysis: 10-year US Treasury Note Yield Chart (D1)

US Dollar Breakout Yet to Gather Shape - Here's What Needs to Happen

The flattened yield curve over the past several weeks has been the biggest obstacle the US Dollar has faced, particularly with respect to the USDJPY: whereas US equity markets just traded to fresh 2014 and all-time highs, USDJPY has been pinned in a range between ¥101.20 and 103.05 for the better part of the last three months.

Forex Technical Analysis: USDJPY Chart (D1)

US Dollar Breakout Yet to Gather Shape - Here's What Needs to Happen

- USDJPY remains mostly disconnected from US yields, insofar as the drop in yields would suggest that the USDJPY should be trading lower, near if not ¥100.75.

- In the short-term, the post-NFP high near ¥103.05 should cap gains; a pivot through this level would represent a significant turning point for USDJPY. It is thus an appropriate reference point for managing risk.

- Former support near ¥101.20/30 is currently being tested, which if broken would allow for a move towards the yearly low, ¥100.75.

Forex Technical Analysis: USDOLLAR Chart (D1)

US Dollar Breakout Yet to Gather Shape - Here's What Needs to Happen

- USDOLLAR (equal-weighted USD long versus AUD, EUR, GBP, JPY short) posted a significant inverted hammer yesterday, typically signaling a bearish reversal in price.

- The bearish hammer occurred at a former level of support near 10495, where price had bottomed out during late-March and early-April before spilling over.

- The downtrend from the January and March highs remains, with the most recent rejection coming on Friday.

- Only a weekly close through 10495 will warrant reconsideration for a bullish bias.

Read more: Sea Change in Central Bank Policy Leaves EUR/JPY, GBP/JPY Vulnerable

--- Written by Christopher Vecchio, Currency Analyst

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16 May 2014 11:25 GMT