USD/JPY Forecast: 2Y US-Japan yield spread hits 11-year high in USD-positive manner

The widening two-year yield spread could keep the USD/JPY pair solidly bid today.

At press time, the currency pair is trading at a four-day high of 111.32 and looks set to extend gains as the spread between the US two-year treasury yield and the Japanese two-year government bond yield has risen to 282.7 basis points - the highest level since November 2007.

Further, the US-Japan 10- year yield spread has moved above the H&S neckline, negating the bearish pattern, meaning the odds of a sharp narrowing of the spread in the USD-negative manner (or JPY-positive) have dropped.

As a result, the path of least resistance appears to be on the higher side. However, a break above 111.76 (last week's doji candle high) is needed to put the bulls back into the driver's seat, as discussed yesterday. 

Also, the ascending (bullish) 20-week MA has acted as a strong support two times in the last four weeks. Hence, a weekly close below that level would weaken the bullish case.

That said, only a move below 109.77 (August low) would confirm a bullish-to-bearish trend change. This scenario appears likely if the US President Trump opts for an all-out trade war with China. 

Two-year yield spread

10-year yield spread

USD/JPY Weekly chart

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