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The US Dollar Index has continued to trade at lower levels after breaking back below support from the 200-day moving average at just above 92.400 on Tuesday. In the FX space, the USD/JPY pair is set to be the pair most vulnerable to lower US Treasury yields, Lee Hardman, Currency Analyst at MUFG Bank, reports.

See:  USD/JPY to march forward to 112.50 in the second quarter – Credit Suisse

Reversal in FX price action as LT yields lose upward momentum

“The trigger for the reversal in the FX market appears to have come from the bond market. The 10-year US Treasury bond yield has moved further below the peak from the end of last month at 1.77% and fell to a low yesterday of 1.65%. The move higher in long-term yields has lost upward momentum since the middle of last month.”  

“Our own correlation analysis reveals that US dollar performance remained negatively correlated to global equity market performance over the past month. Recent underperformance of the US dollar, Canadian dollar and pound is more likely yield driven though as all had benefited from domestic yields moving higher more than elsewhere in Q1.”

“At the current juncture, we are more inclined to view the recent correction lower in yields as temporary although the loss of upward momentum is encouraging and suggests that financial markets are now better priced for the improving global growth outlook. It could help to reduce the risk of another disruptive taper tantrum event. It has been notable that the global economic data flow has continued to surprise to the upside as yields have lost upward momentum since the middle of last month.  

“USD/JPY has been the most sensitive G10 currency pair to rising US yields. The loss of upward momentum for yields will make it harder for USD/JPY to sustain levels above 110.00 and could eventually trigger a deeper correction lower.”