USD/JPY rallies to fresh annual highs above 109.50

USD/JPY surged to fresh highs for the year on Friday, breaking above resistance in the 109.30s to print session highs in the 109.80s. The pair has now pulled back a little but still trades above the 109.50 mark. That equates to on-the-day gains of about 40 pips or just under 0.4%. On the week, the pair now trades with gains of about 0.7%.

Driving the day

USD/JPY got the impetus it needed to break to the north of recent ranges on Friday; US government bond yields, which have admittedly pulled back from earlier highs, saw substantial upside on Friday, with the 10-year yields rising as high as 1.68% from overnight levels around 1.62%. The subsequent widening of the US/Japan rate differential was the catalyst required to push USD/JPY back to the north of the 109.30s and on to fresh annual highs. As yields pull-back, the pair is dropping back in tandem.

The combination of unfavorable moves in global bond markets (that have further increased the Japanese rate disadvantage), combined with a more risk-on feel to trade (global equities, crude oil markets and risk-sensitive currencies all trade with decent gains on the session) are weighing on safe-haven JPY, hence why it sits at the bottom of the G10 performance table on the day. A very slightly stronger than forecast Tokyo Core CPI reading for the month of March released last night has not come to the aid of the yen and showed that the Japanese economy remains in deflation with prices dropping 0.1% YoY.

Looking ahead, USD/JPY will have to contend with quarter-end rebalancing flows at the start of next week and could subsequently be choppy. But there will also be plenty of crucial data releases out of both the US and Japan to keep tabs on; on Tuesday, Japanese February Retail Sales data is out, on Wednesday, US March ADP National Employment and Japanese February Industrial Production is due, on Thursday, Japanese Q1 Tankan Manufacturing Survey data and the US March ISM Manufacturing PMI survey is out and, on Friday, its US NFP day (and good Friday holiday, so an early close).