USD/JPY has lost huge ground since the nonfarm payrolls and subsequent dovish hike from the Fed last week. The story, on an intermarket analyses, lies with the divergence between the Central Banks and global concerns still - so it is not just the spread between the Yen and USD carry that matters here.
The market is still factoring in around a 60% chance of the next Fed hike will be occurring in June. Today, US 10yr treasury yields fell from 2.50% to 2.47% for a two-week low while 2yr yields fell from 1.32% to 1.29%. As yields continue to edge lower and while there are plenty of uncertainties in global markets, then Yen remains favourable despite the BoJ's stance on their inflation target and a subsequent dovish outcome from the recent meeting.
In fact, we will get the latest BoJ minutes from the late January meeting this week, but that is an unlikely event to stir up any changes in the yield spreads that still remain wide, albeit today's drop in US yields is certainly a supportive factor for the day ahead as we head towards the close and Asian trade. However, the CFTC positioning remains bearish for the yen and the broader tone appears tentative. "JPY’s risk profile leaves it vulnerable to knee-jerk, haven-driven gains in periods of risk aversion," explained analysts at Scotiabank.
From a technical point of view, Valeria Bednarik, chief analyst at FXStreet explained that the risk remains towards the downside, " The price held well below its 100 and 200 SMAs both still horizontal far above the current level in the 4 hours chart, whilst the RSI indicator holds flat at oversold levels and the Momentum hovers back and forth below its 100 line.
A downward acceleration below 112.50 should see the pair nearing the 112.00 level, where the pair has the 38.2% retracement of its late 2016 monthly rally, with scope to extend afterwards towards the 111.60 region, where the pair bottomed multiple times this year."