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  • USD/JPY has rallied back to the top of the 108.30s-109.20s range of the last three weeks.
  • Further upside in US bond yields is likely going to be needed to push the pair to fresh annual highs.

USD/JPY has rallied back towards the top of the 108.30s-109.20s (ish) range that has been in play for most of the last three weeks on Thursday. Currently, the pair is stabilising around 109.15, up just over 40 pips or about 0.4% on the session.

Driving the day

JPY is amongst the worst performing currencies in the G10 on Thursday, down about 0.4% on the session versus the US dollar, with similar-sized losses being seen in EUR, CAD and CHF. No specific single fundamental catalyst or piece of news can be pointed at as weighing on the yen on Thursday. Meanwhile, US bond markets have been mixed, with yields still substantially lower on the week (in other words, USD/JPY is not receiving an impulse from US/Japan rate differentials). Rather, the currency just seems to be falling victim to a USD that just seems to want to break higher; Thursday’s rally in the DXY has taken it above its 200DMA for the first time since the end of May.

The recipe for USD/JPY to break higher

The 109.20s-109.30s is a key area of resistance for USD/JPY, one which it has failed to break to the north of on Thursday. The fact that USD/JPY has remained locked inside recent ranges and failed to make further annual highs this week is not really much of a surprise given that 1) the pair has already come a long way this month, rallying all the way from under 107.00 and 2) US/Japan rate differentials, a key driver of the recent rally, have narrowed this week as US bond yields have come under pressure.

However, with prices having consolidated over the past few weeks, bulls will have caught their breath for the next push higher. All that will be needed is further widening of US/Japan rate differentials or, in other words, further upside in US government bond yields.

On which note; things still look pretty positive in the US; the vaccine rollout is going well, with US President Joe Biden announcing at Thursday’s press conference that the new aim for his first 100 days in office is to offer 200M vaccine doses after the 100M aim was easily eclipsed. Meanwhile, economic data this week (survey data anyway) show that the US’ economic recovery is on track and Fed officials, whilst still admitting there is a long way to go for a full economic recovery, are all sounding pretty bullish on the US economy in 2021, with some even talking about hikes in 2022 and 2023.

One Fed official even voiced surprise that bond yields aren’t actually higher than they currently are. With the economic outlook is so rosy, risks seem tilted towards higher yields (bullish for USD/JPY), despite the recent pullback. Meanwhile, this narrative of optimism in the US comes at a time when much of the rest of the world is becoming increasingly pessimistic (EU going back into lockdown amid the third virus wave, which is now affecting key EM economies). US outperformance versus the world is typically USD positive – more reason to be long USD/JPY.