- USD/JPY is reporting gains above the 50-day moving average (MA) of 111.07.
- The implied volatility premium for the JPY call options (bullish bets) has hit 2.5-week low.
- The rally contradicts the bearish development in the US-Japan yield differential.
The USD/JPY is flashing green at 111.27, having defended the 50-day moving average (MA) earlier today.
The anti-risk JPY is on the defensive as the US President Trump’s deal with Mexico put a bid under the risk assets on Monday.
Further, Bloomberg is reporting this Tuesday morning that German Chancellor Merkel and President Trump had agreed to engage in talks over the US-EU trade barriers. So, it seems safe to say that for USD/JPY, the path of least resistance is on the higher side.
A similar sentiment is echoed by the USD/JPY one-month 25 delta risk reversals, which are being paid at -1.2 JPY calls – the highest level since Aug. 8. The sharp rise from the recent low of -1.8 JPY calls indicates a drop in demand or a drop in the implied volatility premium for the JPY calls options (bullish bets).
While the broader market sentiment and the risk reversals favor further gains in the USD/JPY, the yield differential supports the JPY bulls. The 10-year US-Japan yield differential is currently seen at 275 basis points and looks set to drop in the JPY-positive manner, having witnessed a head-and-shoulders breakdown earlier this month.
USD/JPY Technical Levels
Resistance: 111.35 (previous day’s high), 111.88 (61.8% Fib R of 113.18/109.77), 112.00 (psychological level)
Support: 111.07 (50-day MA), 110.79 (10-day MA), 110.59 (July 26 low)
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