FX Update: JPY twisting in the breeze on fresh US yield rise.

FX Trading focus: Fresh highs for most points on the US yield curve support USD, smash JPY

There seemed no specific trigger as US yields rose to their highest level for the cycle into this morning from all points between 5- and 10-years on the US treasury yield curve, helping to drive the ongoing resurgence in the US dollar, particularly against the lowest yielders and those countries whose bond yields are less responsive to the rise in US yields.

Given that the Bank of Japan recently declared a band only 25 basis points either side of zero for the permissible band for 10-year JGB’s (and especially given that 10-year JGB yields aren’t even pressuring the top side of that band – trading overnight just below 10 bps still), the JPY has proven the most sensitive to US longer yield rises and USDJPY has burst above the 110.00 level this morning, a day ahead of the quarter end  and the Japanese financial year end. Some believed that the weakest quarter for US treasuries in over 40 years (assuming we don’t see a massive rally through tomorrow) might see significant portfolio rebalancing into quarter-end, but if that has been the case, it has failed to support the treasury market notably.

The key development to watch in the coming days is whether rising US yields begin to act as a strong headwind for yield-sensitive assets like growth stocks and risk sentiment generally, which could see the USD rise deepening and broadening, adding pressure on the downside for commodity currencies and especially EM currencies. There are signs of this development since this morning here in Europe. In this morning’s Saxo Market Call podcast, we discussed the treasury yield rise, together with the notable ongoing resilience in junk debt despite a torrent of issuance this year, something that continues to signal that financial conditions have yet to tighten meaningfully beyond the rise in treasury yields. Indeed, the Fed may remain dismissive of US yield rises as long as US inflation and especially employment data continue to improve materially in coming weeks and months and  metrics like those credit spreads continue to suggest that all is quiet on the financial stability front.

Chart: USDJPY weekly 
USDJPY breaking key resistance here ahead of the Japanese financial year-end tomorrow, with 110.00 unable to hold as US treasury yields from 5-10 years hit new highs for the cycle overnight. Tonight will be the final day of the Japanese financial year, but we will likely to see any dramatic pivot in the price action here if US yields continue to rise apace, given that the Bank of Japan has already moved to “cap” yields with its declared target of keeping yields within 25 basis points of zero.