Down, Down and Away for the Yen?

The Japanese yen has taken a pause from Monday’s slide. Currently, USD/JPY is trading at 113.44, up 0.10% on the day.

Yield differentials send yen tumbling

The Japanese yen had an awful start to the week. USD/JPY climbed 0.98% on Monday as the pair punched into 113-territory for the first time since December 2018. US Treasury yields have been on a sharp upward trajectory since late the Fed’s policy meeting in September, when the central bank hinted that it could start to taper as soon as November. The 10-year yield has risen to 1.6% for the first time since June, buoyed by expectations that the Federal Reserve will taper prior to the end of the year.

Investor enthusiasm for an imminent tapering was not curbed by last week’s disappointing US employment report, as the economy added only 194 thousand new jobs, well below expectations. This was the second straight NFP report with a weak gain, but the dollar didn’t miss a beat, as the market fully expects a taper in December, perhaps even in November. The soft NFP was forgiven as the unemployment rate and wage growth showed an improvement in September. The Fed has insisted that high inflation is transient, but with inflation hitting a 30-year high, it’s clear that the Fed cannot simply dismiss inflation as being temporary, and will have to tighten policy sooner rather than later.

The yen is extremely sensitive to the dollar/yen yield differential, and the yen has taken it on the chin as US yields have been moving higher. USD/JPY rallied strongly overnight, and if US yields continue to rise, the yen is likely to test the 114.00 level. The energy squeeze is also weighing on the yen, as oil is denominated in US dollars.

USD/JPY Technical

• We have seen a clear break above resistance at 112.20. The next key resistance level is 114.20, the high in November 2018.  USD/JPY has strong upward momentum and could break above this line in the short-term.
•  There is support at 111.29, followed by 110.34