USD/JPY recovers to upper 113.00s, in tandem with tepid recovery in longer-term US yields

USD/JPY has seen a solid rebound on Monday, bouncing from earlier session (and last week’s) lows around 113.00 to session highs in the upper-113.00s, where is continues to trade midway through the US session. A brief dip below the 50-day moving average, which currently resides at 113.13, earlier in the day was used as a dip-buying opportunity. For now, though, selling pressure ahead of the psychologically important 114.00 level and the 21DMA just above it is preventing any further gains. Thus, while the pair does trade higher on the day by about 0.4%, USD/JPY remains about 1.5% below last week’s highs around 115.50.

The main reason for the pair’s rebound on Monday, as well as the main reason why it still remains some ways below recent highs, has to do with its tight correlation to US bond yields. The 10-year yield has bounced well since hitting its 200DMA At 1.48% last Friday and is on Monday trading well back to the north of 1.50%. But at 1.525%, that still leaves it some 16bps below last week’s pre-Omicron highs just shy of the 1.70% mark. Recall that market sentiment took a sharp turn on Friday as fears about the newly discovered, highly transmissible and potentially vaccine-resistant Omicron Covid-19 variant emerged. That saw markets dial back aggressively on their Fed rate hike bets, which encouraged investors to pile into bonds for their safe haven properties, as well as on the expectation of lower for longer.

Markets have been somewhat reticent to rebuild these Fed hike expectations back on Monday, despite the more risk-on market tone and early signs out of South African that those ill with the new variant (so far) are showing mild symptoms. The implied yield on the December 2022 eurodollar future (a proxy for where markets think the Fed funds rate is going to be) remained around 0.9% on Monday, having dumped from its pre-Omicron highs around 1.08% last week.

Caution makes sense. Fed Chair Jerome Powell is scheduled to speak at 2005GMT. Then, the rest of the week is packed with Fed-related risk events such as plenty more Fed speak (including a two-day testimony where Powell appears before Congress given his recent renomination) and US ISM and jobs data. As is typically the case, USD/JPY has not been to responsive to domestic Japanese news. Japan reportedly is set to ban the entry of all foreigners by the end of the month. Meanwhile, Retail Sales data there for October was broadly in line with expectations and showed a sluggish YoY pace of growth.