USD/JPY subdued above 110.50 despite sharply lower US yields, as risk-on hits haven FX

USD/JPY saw very modest losses on Thursday, dropping about 0.1% after having spent most of the session consolidating between 110.60-110.80 parameters. To the upside, the 111.00 level is the next psychological hurdle ahead of the March 2020 highs in the 111.70s and the February 2020 highs in the 112.20s. To the downside, there is not really anything by way of meaningful support until all the way back to the 109.30s, an area which provided strong resistance then solid support in March.

Driving the day...

US government bond yields dropped sharply on Thursday, with the 10-year shedding about 7bps to fall under 1.68% and the 30-year yield plummeting by an even greater margin. Naturally, US/Japan rate spreads tightened significantly, but surprisingly this did not come to the aid of USD/JPY.

Rather than FX markets trading as a function of rate differentials, FX markets appear to have traded more as a function of risk appetite on Thursday and risk was very much on. This weighed on safe-haven currencies such as USD, JPY and CHF, with the three currencies propping up the bottom of the G10 performance table on the day.

For reference, US stocks surged, with the S&P 500 surpassing 4K for the first time and crude oil markets also surged despite OPEC+ agreeing to gradually ease output from May. This has weighed heavily on the yen, which has a historically negative correlation to these risk-sensitive asset classes.

So why was risk appetite so strong on Thursday? Market commentators have cited the afterglow of US President Joe Biden’s $2T in infrastructure spending over the next eight years announcement on Wednesday, as well as a much stronger than expected US ISM Manufacturing PMI survey for the month of March.

Looking ahead, most countries of Christian heritage (including the US, Canada, most of Europe, Australia and New Zealand) have a public holiday on Friday for the first day of Easter celebrations, meaning market closures in most of these countries. There will be some Asia flow coming in over the next few hours as market participants based in China, Japan and South Korea etc. enter the fray, but volumes are likely to be lighter than usual and will be virtually non-existant on Friday.

Nonetheless, the Bureau of Labour Statistics is still going to release the latest US jobs report (for the month of March). When flow comes back online on Monday, things could get choppy as markets get their first proper chance to react to and digest what happened.

Technical levels