The Dollar/Yen is trading higher on Tuesday, but the upside momentum is relatively weaker than recent sessions, which could be an early sign that the buying is getting weaker or the selling a little stronger. Technically, the Forex pair is moving closer to its 52-week retracement zone at 107.154 to 108.230, which could prove to be formidable resistance.
At 08:36 GMT, the USD/JPY is trading 106.870, up 0.105 or +0.10%.
Traders Continuing to Monitor Treasury Yields
Rising Treasury yields took the USD/JPY higher and falling yields could drive the Dollar/Yen lower. Although yields have been edging lower since last Thursday, we don’t expect to see the next major move until Thursday or Friday. Fed Chair Powell speaks on Friday and the U.S. will release its February Non-Farm Payrolls report on Friday.
Why should you be paying closer attention to global bond yields? Because that is what the major central banks are watching and they control the money.
Currency markets have taken cues from the global bond market, where yields have surged in anticipation of an accelerated recovery. Bond moves have been trumping economic data as the driver of foreign-exchange markets, but the central banks believe yields are moving well in advance of economic fundamentals and they could intervene collectively to make sure rates come down. This would put pressure on the USD/JPY.
Pay Attention to What the RBA is Doing
While U.S. Federal Reserve officials are busy downplaying the runaway inflation narrative that bearish bond investors are pushing, the Reserve Bank of Australia (RBA) has been making larger-than-expected asset purchases. Additionally, European Central Bank policymaker Francois Villeroy de Galhau said the recent rise in bond yields was unwarranted and the ECB needs to push back using the flexibility in its bond purchase program.
Traders could be waiting for the Bank of Japan to make its move in stemming the rise in bond yields.
BOJ Still Ready to Defend Yield Range Before Review
According to Bloomberg, Bank of Japan officials are still prepared to stem any risk of Japan’s benchmark bond yield rising too much ahead of a policy review later this month and could even act before it hits 0.2%, according to people familiar with the matter.
The central bank has no pre-set yield level in mind for entering the market as it depends on the speed of gains, the level, the main reasons behind increases and the state of global financial markets, among other factors, they said. Nonetheless, USD/JPY traders should be prepared.
The current gains in Treasury yields present a particular problem for central banks such as the BOJ that target yield levels.
The BOJ can limit yield gains by buying more bonds in scheduled or unscheduled operations. Offering to buy an unlimited amount of bonds at a fixed-rate above the market is one of its most powerful tools.
Ultimately, the direction of the USD/JPY will be determined by what the Federal Reserve intends to do if rising yields get out of control. Inaction by the Fed and an intervention by the BOJ would widen the spread between U.S. Government bonds and Japanese Government bonds, favoring the U.S. Dollar.
“Unlike the Fed, it’s hard for the BOJ to sit tight in the face of a yield rise,” Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities, wrote in a report Monday. “The BOJ could be tested by the market again on its stance to keep the yield low.”
For a look at all of today’s economic events, check out our economic calendar.