USD/JPY intermarket: spreads continue to be the driver

Currently, USD/JPY is trading at 112.87, up 0.61% on the day, having posted a daily high at 113.07 and low at 112.13.

The Japanese yen has been underperforming all of the G10 currencies with the exception of NZD on Tuesday. 

Interest rate differentials

Interest rate differentials continue to be the dominating factor in an environment of rising U.S. Treasury yields with the 2Y U.S.-Japan yield spread extending its rally to a fresh post-crisis high around 170bpts and the highest since 2008. The 10Y spread is also reversing its recent drop and pushing back toward last week’s multi-month high around 230bpts. The dollar has continued to bounce vs the yen on the occasions that the spread moves in favour of the greenback, as seen from 111.60 and when the market started to price in fundamentals, such as a new Fed chair and the increasing odds of a December hike. As the spread moved higher, so did USD/JPY and it has not looked back since, only capped by the psychological 113 handle.

Wall Street

US stocks hit fresh records, Dow cracks 23,000 mark

US equities have continued to rally in earnings season and the yen is negatively correlated as investors look to park idle capital for a return in ties of risk-on. 

Japanese politics

"Comments from the BoJ’s Sakurai have underscored the outlook for policy divergence between an accommodative BoJ and a tightening Fed. Sakurai highlighted the need to maintain powerful easing. Lastly, shifting election prospects for PM Abe are driving a considerable moderation in the premium for protection against JPY strength. Abe’s coalition is expected to maintain its super majority," the analysts at Scotiabank explained.

USD/JPY levels

The analysts at Commerzbank noted that USD/JPY’s correction lower paused along the 200-day ma at 111.76, a fall through which would leave the 55 day ma at 110.81 exposed and said that while above here it will remain well placed for a recovery from a slightly longer term perspective. "Above the 113.44 current October high will trigger further gains to the top of the range at 114.38/49. It is where the May and July highs were made."