USD/JPY Forecast: Still lags 2-year treasury yield, potential for upside break

The Dollar-Yen pair snapped the four-day winning streak on Friday as it ended on a weaker note at 114.02 levels. Friday’s loss may have surprised many given that Federal Reserve chair Janet Yellen gave investors a pretty clear sign on Friday that the central bank intends to raise interest rate later this month - and more hikes to follow later this year.

Profit taking ahead of the weekend could have been the reason for Friday’s weak close.

European equities could lift the pair

Geopolitical uncertainty has raised its ugly head this Monday morning. North Korea fired at least four missiles and thus risk has been taken of the table. Thus, Dollar-Yen dropped to a low of 113.72 in the Asian session.

However, things do not look as bad as previously thought. Stocks in Australia, New Zealand have turned positive. South Korea’s Kospi has trimmed losses as well, while the Hang Seng is trading 0.13% higher.

If European equities open on a positive note, we can expect the USD / JPY pair to regain the bid tone and move back above 114.00 levels.

Lags 2-year treasury yield

The two-year treasury yield, which tracks short-term rate hike bets, jumped last week to its highest level since 2009. Let us compare the price action in 2-yr yield and USD/JPY since the Dec rate hike

• The 2-yr yield clocked a high of 1.308% on Dec 15 and since then was restricted largely to a narrow range of 1.30% to 1.10%. The upside breakout from the trading range happened last week.
• Meanwhile, the Dollar-Yen pair topped out at 118.66 on Dec 15 and fell to a low of 111.60 in February.

The yield currently trades well above Dec 15 high of 1.308%, while the Dollar-Yen pair is almost 500 pips below the high of 118.66. Thus, it can be concluded that there is plenty scope for the USD/JPY pair to rally given it has lagged the 2-year yield amid heightened odds of March Fed rate hike bets.

Technicals - Bulls need an upside break from sideways channel

Daily chart

• A daily close above the channel resistance would add credence to the argument that the spot has bottomed out at 111.60 (Feb low) and open doors for a revisit to 118.66 (Dec 15 high). The RSI is already above 50.00, pointing to a potential bullish break ahead.
• On the downside, only a daily close below 10-DMA would reduce the probability of an upside breakout.

A sustained break above channel resistance looks like a done deal unless Friday’s US wage growth numbers miss estimates by a wide margin.

AUD/USD Forecast: Eyes 200-DMA support of 0.7525

Daily chart

• Thursday’s close below 0.76 handle added credence to the rounding top formation on the price chart, bearish break on the RSI and opened doors for a retreat to the 200-DMA level seen today at 0.7525.
• The fact that we have a golden crossover - bullish crossover between 50-DMA and 200-DMA - which is a lagging indicator also suggests we are heading lower to 200-DMA and possibly below 0.75 handle in the next few days.
• On the higher side, only a daily close above 0.76 would abort a bearish move, however, bullish move would be revived only after a weekly close above 0.77 handle.