Triple divergence in USDJPY

USDJPY continues lower toward important support areas, and momentum is waning – but where is the turnaround? Ask the bond market…

The USDJPY has almost come full circle – unwinding nearly all of the rally from the massive boost that the BoJ gave to JPY crosses at its February 14 meeting, when it announced a new determination to defeat deflation. Lately, during the heavy bout of risk aversion, the JPY has been the G-10’s top performer. This is often the case, especially when interest rate spreads collapse. That has indeed happened in JPY crosses like EURJPY and AUDJPY, but the interest rate spreads at the short end of the curve for the US versus Japan (historically the most important) actually remain near the upper end of the recent range, suggesting somewhat less support for further USDJPY erosion lower. Still, if we move out the curve, the US –Japan 10-year spread posted a record low this week at below 80 bps. What to believe?

From here, if bond yields manage to fall further still, we could see USDJPY grind even lower toward its last support areas just above 78.00, but important support is already slightly above these levels at the 200-day moving average around 78.60 and the chart is also showing so-called “triple divergence”, in which a third new low has been set while a momentum indicator like the MACD continues to creep higher at each new low. This suggests a consolidation could be in order in the nearest term.