USD/JPY looks very stretched relative to real yield differentials – TDS

The drop in real yields has recently been at odds with some cross-asset developments, which have otherwise shown deference to price action in that space. The most notable here is USD/JPY, where the break of 110.40 would have analysts at TD Securities targeting more downside in the pair.

USD/JPY to suffer selling pressure on a break below 110.40

“The push lower in TIPS made yesterday’s gains in the USD all the more interesting as correlations to real yields have otherwise been fairly high. That said, we’ve seen a significant drop off there in recent days on some of the shorter-term measures. Only time will tell if this is simply a consequence of summer markets or is the start of a deeper shift in cross-asset relationships.”

“Over the last few months, USD/JPY has been grinding higher in what is now a well-defined trend channel. For the last week or two, we have been keeping a close watch on the lower boundary of this channel. The pair tested this support, which now comes in at 110.40 today – a level that also corresponds closely with a series of range lows from late last month. All else equal, this suggests we could see a fair amount of selling pressure emerge if we do get a break lower.”

“We think the next primary attractor to the downside would be the 109.72 pivot.”