Analysts from Danske Bank point out that the USD/JPY pair remains highly correlated with US bond yields. They see that more gains in USD/JPY require the sell-off momentum in the US fixed income market to be sustained.
“USD/JPY remains highly correlated with the 10Y US treasury yield and the combination of neutral speculative JPY positioning and higher US 10Y yields could be a supporting factor for USD/JPY near term.”
“USD/JPY and 10Y UST correlation is likely to remain intact as long as volatility in the US fixed income market remains low, and thus USD/JPY may still benefit from higher US yields.”
“The sell-off in the US fixed income market is likely to remain a key driver for the USD/JPY and while the flattening of the US yield curve remains a challenge for Japanese investors, as the rising FX hedge cost erodes the return in US FI assets, we think that the combination of a neutral speculative JPY positioning and higher US 10Y yields could be a supporting factor for USD/JPY near term (as long as US interest rates volatility does not increase).”
“The cross looks increasingly overbought technically, and we reckon that further rally in USD/JPY requires that the sell-off momentum in the US fixed income market is sustained, which our rate strategists do not expect. We have thus lifted our 1M and 3M forecasts to 109 (107 previously) and 110 (108), respectively.”
“Over the medium term, we expect USD/JPY to remain underpinned by continued global growth outlook and Fed-BoJ divergence, and we expect the cross to eventually settle in the 110-115 range in 6-12M. We now target the cross at 112 (110) in 6M and 112 in 12M.”