USD/JPY Forecast: Scope for losses... T-yield curve continues to flatten

The Dollar-Yen pair is trading around 111.15 levels this Tuesday morning. The Manchester explosion and the resulting risk-off is keeping the Japanese Yen well bid. 

Treasury yield curve flattens - recession or hedging?

• The spread between the 10-year and the 2-year treasury yield is now narrowest since the election. 
• A flatter yield curve usually means recession. However, the US data shows no signs of stress and suggests the economy remains on strong footing.  Moreover, the flatter yield curve (the dip in the long duration treasury yields) could be due to a switch from equities to treasuries. 
• Many believe the US stocks are now close to being fully valued. If this is true, the yield curve flattening could continue. This is bearish for the Dollar-Yen as the pair is more sensitive to the long duration yields. Only a talk of faster Fed rate hikes could boost the demand for the US dollar. 

Technicals - Monthly chart

• The rejection at 113.99 (23.6% of 2011 low - 2015 high) earlier this month, followed by a drop to 111.00 levels despite last month’s long-legged Doji candle is disheartening for the USD bulls.
• The retreat from 113.99 has also kept the falling top formation intact. 
• Thus, the spot could re-test 110.00 levels in the short-run. Two consecutive daily close below 110.00 would open doors for a sell-off to 108.13 (recent low). 
• On a larger scheme of things, only a break above 116.50 (descending trend line hurdle) would revive the bullish view.