The falling energy prices along with growth concerns in China, Europe and now in Japan have capped gains in the Treasury yields in the US. Off-late the yields have failed to rise above a technical resistance even on days of a better-than-expected macro data releases in the US.
Treasury yields stuck
The Ten-year treasury yield in the US has repeatedly failed to rise above the technical resistance at 2.4%.
While the two-year yield, which mimics the short-term interest rate expectations, has failed to rise above 0.6% since July.
The yields barely moved higher despite the Federal Reserve (Fed) announcing an end to its bond purchase program in October.
At the same time, the impact of a slightly hawkish Fed policy statement was minimal on the Treasury yields.
On Friday, the yields failed to rise post a better-than-expected Retail sales and Michigan Confidence data. This only indicates a higher probability of the yields moving lower at short-end and long-end of the market curve.
The Federal Reserve likely to turn dovish
The surprise stimulus from the Bank of Japan on Oct. 31 was followed by an ultra-dovish Quarterly inflation report from the Bank of England.
Meanwhile, the European Central Bank (ECB) is expected to start Asset Backed Securities Purchases (ABS) soon.
Moreover, each major central bank action within the last months led to a sharp decline in their currencies against the US Dollar.
Under such situation, it is highly likely that the Fed would turn dovish with respect to interest rate hike.
Moreover, the Fed risks pushing down inflation expectations further if it sounds hawkish leading to a sharp rise in the US Dollar and the resulting sharp fall in imported inflation.
USD/JPY – BOJ rally has run its course in the short-term, a further up move needs rise in the treasury yields.
The USD/JPY pair rallied from 108.00 levels to 116.00 levels since Oct. 31 while the US Ten-year treasury yield remained largely in a range of 2.3% to 2.4%.
This is indicative of the fact that the rally in USD/JPY was almost entirely driven by the BOJ’s surprise stimulus. Hence it may have run its course, at least in the short-run.
A further upside move needs support from the rise in the treasury yields, which appears a difficult case in the short-term.
The pair is also overbought on daily as well as weekly charts.
To conclude - a correction up to 114 and 112 level cannot be ruled out in the short-term.
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