After a strong March, US 10-year yields and USD/JPY may be ready for a pullback
When the Fed met at its March 16th FOMC meeting, 10-year yields were already on the rise. However, at the meeting, the FOMC noted that ongoing increases in Fed Funds rates are appropriate. In addition, it said that it expects to begin reducing the size of the balance sheet at an upcoming meeting. After the meeting, Fed speaker after Fed speaker came out all whistling the same tune: a 50bps hike is on the table and the Fed most likely will begin reducing its balance sheet at the May meeting. Inflation data continues to soar, as noted by today’s Core PCE print. According to the CME Fedwatch tool, the market is currently pricing in nearly a 70% chance of the 50bps hike at the May meeting. As a result of the hawkish Fed talk and the increase in inflation, yields have been on the rise during March.
On a monthly timeframe, benchmark 10-year Treasury bond yields have been on a tear. After making pandemic lows in March 2020 near 0.333%, yields began moving higher in a symmetrical triangle. In January, US 10-year yields broke out of the triangle near 1.67%, but only made it as far as 2% before retesting the top trendline of the triangle. In March, yields opened at 1.827% and traded to a high of 2.557% before closing the month near 2.323%. This was a gain of over 27% for the month. Horizontal resistance sits above at 2.612%, 2.81%, and 3.25%. Support is at February’s highs of 2.063% then the March low at 1.668%.
Source: Tradingview, Stone X
USD/JPY has traded on a similar path to that of US 10-year yields, especially since the middle of March. Notice at the bottom of the chart below that the current correlation coefficient between USD/JPY and US 10-year yields is +0.96. A reading of +1.00 means that the 2 assets move in the same direction 100% of the time. A reading of +0.96 is pretty close. So, if one wants to take advantage of the move in yields, one way to trade it could be via USD/JPY. On a daily timeframe, USD/JPY had been trading in an upward sloping channel since early 2021. The pair broke higher above the channel on March 11th near 118.21 and continued moving higher to 125.10 earlier this week. Since then, price has pulled back and thus far, is holding support above a trendline dating back to 2002 (green line) and the 38.2% Fibonacci retracement level from the low of March 4th to the high of March 28th near 121.10.
Source: Tradingview, Stone X
Trade USD/JPY now: Login or Open a new account!
• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
On a 240-minute timeframe, notice that the correlation coefficient between USD/JPY and 10-year yields is still high at +0.88. Readings above +0.80 are considered strong. USD/JPY appears to be setting up a head and shoulders pattern. A break of the neckline at 121.25 would put the pattern into play. The target for a head and shoulders pattern is the distance from the head to the neckline of the pattern, added to the breakdown point, which would be near 117.40. However, first it would have to trade below horizontal support levels at 120.59, 119.12, and 117.70. Resistance above is at the top of the right shoulder near 123.15, then at the head near 125.10.
Source: Tradingview, Stone X
Due to recent increases in inflation (partly due to the Russia/Ukraine way) and the hawkish fed talk, US 10-year yields have been going bid. As a result of the high correlation with USD/JPY, yields have been pulling USD/JPY higher with them. However, both have pulled back a bit, with USD/JPY forming a potential head and shoulders pattern. Watch to see if the pair breaks the neckline. If so, both USD/JPY and US 10-year yields could be lower in a hurry.
Learn more about forex trading opportunities.
This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.
StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.
In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.
StoneX Financial Pte. Ltd. is not under any obligation to update this report.
Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.
ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.
City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.
The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.
The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.
The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.
This advertisement has not been reviewed by the Monetary Authority of Singapore.
© City Index 2024