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USD/JPY stays strong despite a plunge in yields

USD/JPY has so far ignored recent plunge in bond yields as there are really no reasons to buy JPY right now.

The USD/JPY pair traded slightly lower on Wednesday but remained near its cycle highs at 136 as the greenback remains the preferred currency in the FX market.

US macro news eyed

Later today, the US ISM services survey for June is due, predicted to decline from 55.9 to 54.5. The manufacturing ISM, released last week, fell more than expected, so that the same scenario could occur here.

Additionally, the Job Opportunities and Labor Turnover Survey (JOLTS) report, which tracks job openings, hires, quits, and separations for May, will also be released. Job vacancies, which were close to a record high in April at 11.4 million, are anticipated to have decreased to 11 million in May. A very tight labor market and high worker demand contributed to a record-breaking 4.4 million Americans quitting their jobs in April.

Last but not least, the FOMC minutes from June’s Fed meeting will be published, confirming the hawkish narrative among governors, likely strengthening the US dollar.

Given the continued high levels of inflation, traders are preparing for another rate increase of 75 basis points at the end of the month, which has caused the yield on the 2-year Treasury to surpass that of the benchmark 10-year Treasury. This is typically interpreted as a precursor to an impending recession.

You can also read:Β Reserve Bank of Australia raises base rate

Stack of Japanese yen and USD

JPY stays bearish

The US-Japan rate spread shrunk as a result of the recent strong decrease in US Treasury bond yields, which in turn provided some support for the Japanese yen.

On the other hand, any significant advances for the safe-haven JPY were restrained by indications of stability in the equities markets. In addition, a considerable difference between the Federal Reserve’s and Bank of Japan’s stances on monetary policy functioned as a tailwind for the USD/JPY pair. Recall that the BoJ has consistently indicated that it will adhere to its ultra-accommodative policy and that borrowing prices will remain at “current or lower” levels.

Former Bank of Japan Chief Economist Seisaku Kameda predicted that the steep decrease in the yen would improve the inflation outlook. This year, the inflation rate could stay far above 2%.

The critical medium-term support stands at around 131.50, where previous cycle highs are. As long as the USD trades above it, the outlook appears bullish, and dips should be bought.

On the other hand, the resistance will be found in the 136 area, and breaking above it would likely confirm the bullish narrative, possibly sending the USD toward 140.

USD/JPY daily chart, Source: AuthorΒ΄s analysis, tradingview.com

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