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Home ANALYSIS

USDJPY rises off the lows but will it start to follow the yield decline?

A.R Chowdhury by A.R Chowdhury
March 23, 2022
Reading Time: 9 mins read
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USDJPY rises off the lows but will it start to follow the yield decline?

The USDJPY has been up 11 of the last 12 days. The close yesterday was at 120.81. With the current price at 121.06, it looks like 12 of the last 13 days is the odds on favorite now.

US 10 year

US 10 year to Japan 10 year yield spread

If you were look at the run higher, one of the major catalysts has been the sharp rise in the yields in the US and the relative stability of the Japan yields.

More specifically, the US 10 year  yield 
Yield

A yield represents the earnings generated by an investment or security over a certain time period. Yields are typically displayed in percentage terms and are in the form of interest or dividends received from it.These figures do not include the price variations, which separates it from the total return. Consequently, a yield applies to various stated rates of return on stocks, fixed income instruments such as bonds, and other types of investment products.Yields can be calculated as a ratio or as an internal rate of return, which may also be used to indicate the owner’s total return, or portion of income.Why Do Yields Matter?At any point in time, all financial instruments compete with each other in a public marketplace. Analyzing yields is one among many metrics used by analysts and investors and reflects a singular part of the total return of holding a security. For example, a higher yield allows the owner to recoup his investment sooner, and thus mitigates risk. By extension, a high yield may have resulted from a falling market value for the security as a result of higher risk. Yield levels are also influenced by expectations of inflation. Fears of higher levels of inflation in the future suggest that investors would ask for high yield or a lower price versus the coupon today.The maturity of the instrument is also one of the elements that determines risk. The relationship between yields and the maturity of instruments of similar credit worthiness, is described by the yield curve. Instruments over longer intervals commonly have a higher yield than short dated instruments.The yield of a debt instrument is typically linked to the credit worthiness and default probability of the issuer. The more the default risk, the higher the yield would be in most of the cases since issuers need to offer investors some compensation for the risk.

A yield represents the earnings generated by an investment or security over a certain time period. Yields are typically displayed in percentage terms and are in the form of interest or dividends received from it.These figures do not include the price variations, which separates it from the total return. Consequently, a yield applies to various stated rates of return on stocks, fixed income instruments such as bonds, and other types of investment products.Yields can be calculated as a ratio or as an internal rate of return, which may also be used to indicate the owner’s total return, or portion of income.Why Do Yields Matter?At any point in time, all financial instruments compete with each other in a public marketplace. Analyzing yields is one among many metrics used by analysts and investors and reflects a singular part of the total return of holding a security. For example, a higher yield allows the owner to recoup his investment sooner, and thus mitigates risk. By extension, a high yield may have resulted from a falling market value for the security as a result of higher risk. Yield levels are also influenced by expectations of inflation. Fears of higher levels of inflation in the future suggest that investors would ask for high yield or a lower price versus the coupon today.The maturity of the instrument is also one of the elements that determines risk. The relationship between yields and the maturity of instruments of similar credit worthiness, is described by the yield curve. Instruments over longer intervals commonly have a higher yield than short dated instruments.The yield of a debt instrument is typically linked to the credit worthiness and default probability of the issuer. The more the default risk, the higher the yield would be in most of the cases since issuers need to offer investors some compensation for the risk.
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has been running higher while the JPY 10 year yield is up but hardly as quickly. Looking at the spread, it has soared from 153 basis points to 220 basis points (67 basis points or 44%) since March 7th (see chart above).

Today, the spread has moved lower as US yields retreat. The spread has moved down to around 207 basis points.

Now, looking at the USDJPY, from the March 7 low, the price moved up 651 pips to the high earlier today (see the chart below).

The yield spread chart and the USDJPY looks very similar. Interest rate spreads are driving the USDJPY higher.

USDJPY

USDJPY chart looks just like the US/Japan yield spread chart

Now the  USDJPY 
USD/JPY

The USD/JPY is the currency pair encompassing the dollar of the United States of America (symbol $, code USD), and the Japanese yen of Japan (symbol ¥, code JPY). The pair’s rate indicates how many Japanese yen are needed in order to purchase one US dollar. For example, when the USD/JPY is trading at 100.00, it means 1 US dollar is equivalent to 100 Japanese yen.  The US dollar (USD) is the world’s most traded currency, whilst the Japanese yen is the world’s third most traded currency, resulting in an extremely liquid pair, and very tight spreads, often staying within the 0 pip to 2 pip spread range on most forex brokers. Although the range of the USD/JPY isn’t traditionally particularly high, the lack of large price action often associated with other JPY pairs does make it easier to trade.This is especially true for short-term traders, although without offering a great pip potential. Even though the USD/JPY is the world’s second most traded pair, it’s not as popular as one might think with regards to retail traders.The pair carries a reputation as “boring”, although this isn’t an entirely accurate reflection. Trading the USD/JPYThe JPY is highly regarded as a safe haven currency, with investors often increasing their exposure following periods of uncertainty or market-induced fallouts.As both the US and Japan are highly developed economies, there are several key factors affecting the value of either currencies. This includes a range of economic indicators such as gross domestic product (GDP) growth, inflation, interest rates and unemployment data. Monetary policy by the US Federal Reserve and Bank of Japan are also large determinants in the value of each currency.

The USD/JPY is the currency pair encompassing the dollar of the United States of America (symbol $, code USD), and the Japanese yen of Japan (symbol ¥, code JPY). The pair’s rate indicates how many Japanese yen are needed in order to purchase one US dollar. For example, when the USD/JPY is trading at 100.00, it means 1 US dollar is equivalent to 100 Japanese yen.  The US dollar (USD) is the world’s most traded currency, whilst the Japanese yen is the world’s third most traded currency, resulting in an extremely liquid pair, and very tight spreads, often staying within the 0 pip to 2 pip spread range on most forex brokers. Although the range of the USD/JPY isn’t traditionally particularly high, the lack of large price action often associated with other JPY pairs does make it easier to trade.This is especially true for short-term traders, although without offering a great pip potential. Even though the USD/JPY is the world’s second most traded pair, it’s not as popular as one might think with regards to retail traders.The pair carries a reputation as “boring”, although this isn’t an entirely accurate reflection. Trading the USD/JPYThe JPY is highly regarded as a safe haven currency, with investors often increasing their exposure following periods of uncertainty or market-induced fallouts.As both the US and Japan are highly developed economies, there are several key factors affecting the value of either currencies. This includes a range of economic indicators such as gross domestic product (GDP) growth, inflation, interest rates and unemployment data. Monetary policy by the US Federal Reserve and Bank of Japan are also large determinants in the value of each currency.
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as mentioned did move lower today but it has rebounded and is now higher. Meanwhile, the yields in the US are trading at session lows after the A+ auction of the 20 year bonds.

Should the USDJPY be moving lower too?

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There are a lot of things that go into the price action. That is why I like to look at charts and apply tools to the price action.

Earlier today in a post, I took my analysis from the weekly chart all the way down to the 5 minute chart (see post here).

Why?

At turning points, there tend to be “tells” in the short term chart first. The 100 hour MA (and technical tools) are frankly lagging behind after the trend move higher.

Today, earlier in the day the price on the 5-minute chart (see chart below) had fallen below both its 100 and 200 bar moving averages on the 5 minute chart (see blue and green lines), BUT remained above the 38.2% retracement of the last trend leg higher (i.e. from the low on Monday).

In the post from this morning, I commented that if the price could stay below the closing level at 120.81, that would keep the bears in control. However I also mentioned the 100 and 200 bar moving averages on the five minute chart as bullish/bearish barometers. If the price could stay below those moving averages, the sellers would still be in play. It would not be great, but it would be something (they are still in play).

So looking at the five minute chart below, the price did move back above the 120.81 level, and stayed above that level. The price also moved above the 100 and 200 bar moving averages, and stayed above those moving averages (so far).

USDJPY

USDJPY on the 5 minute chart

Are the sellers still in play off those moves?

No. They failed.

if anything, the buyers are more in control above the moving averages.

What would change that bias?

Moving back below the 200 and 100 bar moving averages at 120.98 and 120.917 (and staying below – see blue and green lines).

So, if you think maybe the yields have peaked and the big rotation out of stocks into bonds may start to manifest itself more, what you would like to see is a move back below those 5 minute moving averages on the USDJPY.

That type of break back below, should lead to a rotation back to the downside if all goes to plan.

Conversely, if there is a fake break again like we saw earlier today (i.e. the price moves below the 100/200 bar MAs and then moves back above), then get out.

Remember you are trying to pick a top and that can be difficult. Just ask those traders that have shorted the USDJPY over the last 11-12 trading days.

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A.R Chowdhury

A.R Chowdhury

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