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USD/JPY Forecast: Bond yields do not support USD comeback

Omkar Godbole FXStreet Contributor

The Dollar-Yen pair is flirting with the resistance offered by the trend line sloping downwards from the Aug. 2015 high and Dec. 2015 high.

As of writing, the spot is trading around 114.17 levels. The pair hit a low of 113.62 after the data released in the US showed the average hourly earnings (referred to as wage growth figure) growth stalled in October, missing the estimate of 0.2%.

However, the drop to 113.62 was short lived. The argument put forward by the analyst community is that the drop in the underemployment to 7.9 percent could push up wages ni the near futures. Though the argument sounds logical, so far, the labor market tightening hasn't really translated into higher wage growth. That said, it remains to be seen if the situation changes for good in the future.

The other reason for the strong dip demand could be the increased odds of tax reforms. Whatever the reason, the USD is on the rise, but the treasury yields aren't buying the bullish case-

Treasury yield curve flattest since 2007

10Y US-Japan yield spread struggles to gather upside traction

First of all, the 10-year US Treasury yield is set to end the week well below the key technical level of 2.4 percent.
The yield curve (spread/difference between the US 10-year yield and the 2-year yield) continues to slide; has hit a a fresh 10-year low of 71.88 basis points. A flatter yield curve is bad news for the USD, given the December rate hike has been priced-in by the markets.
The 10Y US-Japan yield spread has retreated from 260 basis points (Oct. 26 high) to 250 basis points (today's level).

Also worth noting is that the technical breakout could lack conviction.

Weekly chart - Don't trust the sideways breach of the trend line hurdle

The above chart shows, the currency pair is trading exactly at the falling trend line resistance of 114.17.
What USD bulls need is a convincing breakout, i.e. a weekly close well above 114.17... at least above 114.50. A sideways breach - the spot ends the current week at or close to 114.17 and opens above the trend line on Monday - cannot be trusted. Sideways breach of key resistance levels shows the market lacks conviction.

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Consolidation with bearish bias is likely over the next week, if the pair fails to end the current week well above 114.17. FXStreet USD/JPY Forecast Poll shows the analyst community expects the pair to trade in the sideways manner next week.

1 Week
1 Month
1 Quarter

1 Week

Avg Forecast 114.43

22% Bullish
22% Bearish
56% Sideways

Bias Sideways

1 Month

Avg Forecast 115.24

67% Bullish
17% Bearish
16% Sideways

Bias Bullish

1 Quarter

Avg Forecast 113.88

31% Bullish
31% Bearish
38% Sideways

Bias Sideways

Only a convincing close above 114.50 would open up upside towards 115.50 (Mar. high).

Also Read - USD/JPY rangebound between 113.00/114.50 – UOB

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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