24 March 2010 at 18:03 GMT
FX Note: Is USDJPY set for a rally 100+?
A big move today as the US 5-year auction results were given credit for setting of a rip-roaring sell-0ff in US bond markets, as the 2-year yield rocketed above 1.00% and the US 10-year yields also stretched sharply higher. This has clear implications for USDJPY, which tends to slavishly follow long US yields, due to its bonds seemingly permanent yield inferiority. Is this the warning shot for a run to 100 in USDJPY?
Focus on US bonds
The USDJPY rally today was not only about the USD strengthening, but also about the JPY weakening. The floodgates really opened up in the wake of the weak US 5-year treasury note auction today.
Chart: US 2-year yield
The 2-year yield benchmark slammed above the 1.00% level for the first time since the beginning of the year, which was supportive of the broader move stronger by the greenback today.
Chart: US 10-year yield
An enormous upside down head and shoulders formation is in place for the US 10-year yield, and today's action took us right back up the critical neckline. Whether this chart continues higher is a critical indicator for the JPY.
Chart: USDJPY and US 10-year yield
Putting USDJPY and the US 10-year yield on the same chart makes it clear why JPY traders need to have an eye on the US bond market.
Chart: USDJPY
Today's shocker of a move took USDJPY above key resistance (55-day, daily Ichimoku, and 200-day moving averages). Does this now pave the way for 100+. If US yields hold higher from here and the USDJPY holds this break above resistance beyond March 31 (next Wednesday and the last day of the Japanese financial year), then the odds increase strongly in favor of this scenario. Natural short-term support comes in at the 200-day moving average around 91.50.
Chart: USDJPY Weekly
The move even took the pair through the weekly descending trendline.
