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US Dollar Forecast: USD/JPY to Follow Surging Treasury Yields

US Dollar Forecast: USD/JPY to Follow Surging Treasury Yields

Rich Dvorak, Analyst

USD/JPY PRICE OUTLOOK: US DOLLAR LIKELY TO RISE AS TREASURY YIELDS SOAR

  • The broader US Dollar could be showing signs of reversing as Treasury yields surge
  • USD/JPY price action just printed a bullish engulfing candlestick on a weekly chart
  • Dollar-Yen rebound looks to challenge a key area of resistance looming overhead
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USD/JPY price action ripped higher this past week as the US Dollar advanced alongside surging Treasury yields. Particularly eye-catching was the 10-year Treasury yield spiking 20-basis points and eclipsing the psychologically-significant 1.00% level. This sharp move likely benefited the Dollar-Yen due to its generally positive correlation and sensitivity to swings in sovereign interest rates.

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US DOLLAR INDEX PRICE CHART WITH 10-YEAR TREASURY YIELD OVERLAID: DAILY TIME FRAME (18 FEB 2020 TO 08 JAN 2021)

USDJPY Price Chart with 10-Year Treasury Yield Overlaid

Chart by @RichDvorakFX created using TradingView

Whether or not the Dollar-Yen and US Treasury yields head higher largely hinges on details from fiscal stimulus and infrastructure bills set to be rolled out by the Biden administration. Owing to the democratic sweep solidified after the Georgia senate runoff, these spending packages are expected to carry ‘high price tags’ and now look easier to find enough support from both houses of congress.

If the 10-year US Treasury yield dips back below 100-basis points, however, this could invalidate the latest topside breakout. The rise might face pushback near the 1.25% level underpinned by its 18 March 2020 high before the 1.50% zone comes into focus as the next potential technical obstacle. Once again, an extended rise by Treasury yields likely stands to fuel US Dollar strength whereas a retracement back lower in yields could weigh negatively on USD/JPY price action.

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USD/JPY PRICE CHART: DAILY TIME FRAME (26 JUN 2020 TO 08 JAN 2021)

USDJPY Price Chart US Dollar Technical Forecast

The jump by USD/JPY over the last few trading sessions coincided with price action ricocheting off its bottom Bollinger Band. This corresponded with another failed push by Dollar-Yen bears into the 102.00-handle. Not to mention, a bullish engulfing candlestick appears to have formed on a weekly chart, which is typically indicative of a reversal in trend and continued upward momentum. USD/JPY price action now faces a critical test of technical resistance around the 104.00-104.50 zone, however. The area is underpinned by July and September lows as well as its 50-day simple moving average.

USD/JPY BEARISH
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 12% 1% 7%
Weekly -2% -6% -4%
What does it mean for price action?
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That said, eclipsing the upper rail of its apparent falling wedge pattern might validate the reversal and increase potential for a move by the Dollar-Yen toward its 200-day simple moving average. This bullish scenario could follow an extended move higher in US Treasury yields. On the other hand, if a smooth transfer of power between Trump and Biden is put into question, as it was during the clash on Capitol Hill this past week, this could spark capital outflows from the United States and strongarm the US Dollar lower.

USD/JPY PRICE CHART WITH ONE-WEEK RISK REVERSAL OVERLAID: DAILY TIME FRAME (18 SEP 2020 TO 08 JAN 2021)

Chart of US Dollar to Japanese Yen One-Week Risk Reversal

Shifting focus to USD/JPY risk reversals we can see that forex options traders have grown increasingly bullish toward the Dollar. In fact, the one-week risk reversal of -0.09 is the highest reading since May 2017. USD/JPY call-put skew readings have ascended sharply across multiple tenors and are now a stone’s throw away from flipping into positive territory.Considering a risk reversal reading above zero indicates that the demand for call option volatility (upside protection) exceeds that of put option volatility (downside protection), this hints at an underlying shift in bias from bearish to bullish.

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-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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