The USD / JPY pair extended Friday’s rebound from the descending trend line support to a high of 113.78 on Tuesday. The bid tone around the US dollar strengthened on account of the uptick in the 10-year treasury yield. The yield clocked a high of 2.46% before ending the day largely unchanged around 2.438%.
Its Japanese counterpart remained flat lined. Traders turned a blind eye towards the jump in the super long JGB yields.
The currency pair was last seen trading around 113.55 levels, while the 10-year treasury yield was flat lined around 2.436%.
Restrained treasury yields represent hunt for yield, safe haven play
A look at the weekly chart of the 10-year treasury yield would force investors/traders to consider the possibility of a technical correction, given the repeated failure around to hold above 2.5%.
However, one needs to read the chart in the current context. Treasury yields are a safe haven asset offering a big yield differential over its European and Japanese counterpart. With Greek crisis redux and heightened political uncertainty in France, the safe haven flows are bound to hit the relatively higher yielding Treasuries.
Consequently, flat lined treasury yields or narrowing of the US-Japan 10-yr yield spread may not weigh over the USD/JPY pair. Only a spike in the Japanese 10-yr yield and the resulting narrowing of the yield spread could hurt the USD/JPY pair.
Fed minutes preview: Watch out for commentary on the downsizing of the balance sheet
The real risk on the horizon is not the interest rate hikes, but a potential downsizing of the Fed’s balance sheet. The Interest rate hike is being acknowledged by the markets as a sign of economic health. However, downsizing of the Fed’s balance sheet along with rate hikes would be a double blow for the liquidity addicted markets.
The minutes could show that a discussion of when and how to shrink the Fed’s $4.5 trillion balance sheet is gathering steam. The dollar could spike across the board if the minutes do highlight that consensus is building on the downsizing of the balance sheet. Equities too could feel the heat and that could keep Yen relatively resilient. What it means that Yen crosses - EUR/JPY, AUD/JPY, GBP/JPY - could drop.
It will be interesting to see if the minutes add color to the strong language on inflation seen in the Feb. 1 statement.
Are Technicals leading (hawkish) minutes?
Daily chart
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Support:
113.29 (5-DMA)
112.62 (Friday's low)
112.15 (descending trend line support)
111.61 (Feb low)
Resistance:
114.00
114.87 (50-DMA)
115.38 (Jan 27 high)
115.62 (Jan 19 high)
Indicators
RSI neutral, flatlined at 50.00
ADX flat lined at 21.54, suggests weak trend
MACD above zero, but flat
- Upside break from falling wedge pattern on Feb 13 followed by a re-test of and rebound from the support offered by upper end of the wedge (or descending trend line) suggests the spot could be heading higher to 50-DMA level of 114.87.
- A daily close above 100-DMA would add credence to the bullish Wedge breakout and the rising bottom formation and open doors for the re-test of 118.66 levels.
- On the downside, only a breakdown of the support offered by the rising trend line at 113.00 would signal bullish invalidation.
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