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  • Rising US yields following Monday’s vaccine news underpin USD/JPY, eyes on US bond market moves.
  • USD/JPY remains supported close to its 50DMA at 105.26 for now.

USD/JPY remains supported above overnight lows, underpinned by further selling pressure in the US government bond market that has seen the US 10-year bond (T-note) yield test five-month highs at 0.96%. On the day, the pair trades marginally lower, down roughly 0.1% or less than 10 pips. 

Sooner than expected economic reopening narrative keeping USD/JPY supported

Yesterday’s positive vaccine news from Pfizer and BioNTech is being hailed by many market participants as a game-changer in the global fight against Covid-19, given that their vaccine has shown to be 90% effective in preventing infection by the virus. Similar technology is being utilised by other major vaccine developers, thus the hopes are that in the coming weeks more vaccine developers will announce positive results.

Thus, markets are in the process of positioning for a faster and more effective than previously anticipated vaccination of the population –particularly in developed countries, many of whom had already made big order’s for the Pfizer/BioNTech vaccine. Thus, global growth expectations for 2021 have received a boost as hopes for an earlier than expected reopening grow. 

This has undermined demand for safe-haven assets such as JPY, with investors rushing into riskier, higher-yielding assets such as stocks and EM currencies, which are now expected to perform better in 2021. EUR/JPY, GBP/JPY, CAD/JPY and AUD/JPY were all boosted on Monday and continue to trade at or close to multi-month highs.

Meanwhile, USD/JPY was also lifted on Monday, despite the fact that investors also look at USD as a safe haven currency. The major factor driving USD/JPY higher was instead a significant increase in the US rate advantage over Japan assets – when comparing the yields of US government bonds to Japanese government bonds.

The BoJ has in place a policy of yield curve control that keeps the yield on the 10-year Japanese government bond capped at “around 0%” and, since its implementation in 2016, yields on the Japan 10-year bond have rarely risen above 0.1%. While Japanese bonds remained largely unmoved, Monday’s vaccine news prompted a stunning more than 0.15% rise in US 10-year bond yields to highs of 0.963%, leading investors to dump Japanese bonds and flood into US bonds (USD/JPY positive). 

During the Tuesday Asian session, the US 10-year yield slipped to lows of under 0.92%, coinciding with USD/JPY  briefly sliding back below 105.00. However, US bond yields have since been picking up again, with the US 10-year yields back close to Monday’s highs around 0.96%. USD/JPY has thus been driven back above 105.00 and towards Monday’s highs of above 105.50.

Looking ahead, bond market dynamics look set to continue playing an important role in driving USD/JPY price action. Given the latest news on the vaccine front, as well as the election of Biden –which ought to foster better global growth and more predictable trade relations–, the Federal Reserve might find it hard to justify more QE in 2021, something which might facilitate a further rise in US bond yields, thus further supporting USD/JPY.

However, US Covid-19 infection rates are currently on an alarming trajectory, with hospitalisations at the highest right now as at any point during the pandemic thus far, meaning the Fed could be excused for taking a more cautious outlook in the short run. This, combined with the recent rise in US bond yields itself –which might alarm the central bank that is trying to keep borrowing costs low to foster the recovery– might be enough for the Fed to decide more QE is needed in the short term. This could be a USD/JPY negative.

USD/JPY magnetised to its 50DMA for now

Since recovering from Monday night lows beneath 105.00, USD/JPY has been more subdued over the last few hours, with the pair sticking close to its 50 day moving average (DMA) which resides at 105.26.

To the downside, there is the 21DMA at 104.78, which seemed to have acted as strong support overnight (the Asian session low was put in at 104.82). To the upside, there is Monday’s high at 105.65 and above that the 20 October high at 105.71.