- Recent hawkish statements from Bank of Japan (BoJ) officials, along with a softer US core CPI reading for December, have created a temporary cap on the US dollar’s strength against the yen.
- The prevailing 10-year yield spread of US Treasury notes has experienced a bearish breakdown.
- The medium-term uptrend of USD/JPY, which began from the low on September 16, 2024, is at risk of evolving into a potential multi-week corrective decline.
- Keep an eye on the critical resistance level of 158.35/80 for USD/JPY.
Since the beginning of the year, the USD/JPY pair has begun to soften, reversing the strength observed in the last quarter of 2024.
Figure 1 illustrates the year-to-date performance of the US dollar against major currencies as of January 16, 2025 (Source: TradingView).
As of the close of trading on January 16, the US dollar’s year-to-date performance has been the weakest against the yen, with the USD/JPY pair declining by -0.77% (see Fig 1).
This week, comments from BoJ Governor Ueda and Deputy Governor Himino highlighted a more optimistic outlook regarding Japanese corporations increasing employee wages compared to December.
These encouraging remarks on wage growth in Japan suggest a potential rate hike at the BoJ’s upcoming policy meeting, concluding on January 24, which has softened the prior bullish momentum for USD/JPY. This sentiment coincides with a softer core US CPI print, easing from 3.3% in November to 3.2% year-on-year in December, slightly below expectations.
Long-Term Shrinking Yield Premium of US Treasuries Over JGB
Figure 2 depicts the 10-year yield spread between US Treasuries and Japanese Government Bonds (JGB) alongside the USD/JPY performance as of January 16, 2025 (Source: TradingView).
The yield spread between US Treasuries and JGB shows a direct correlation with USD/JPY movements (see Fig 2).
Historical data indicates that changes in the 10-year yield spread of US Treasuries against JGB often precede movements in USD/JPY. This was evidenced when the yield spread began to decline on November 5, 2024, dropping below its 20-day moving average by November 20, 2024.
This previous downturn in the yield spread mirroring a medium-term decline in USD/JPY of 7% from November 14, 2024, to December 2, 2024.
Currently, a similar bearish trend has emerged in the 10-year yield spread of US Treasuries over JGB, noted from January 13 to January 14, 2025, where the premium dropped from 3.6% to 3.7%, alongside a dip below the 20-day moving average.
If this downward trend in the yield spread continues, USD/JPY may face further downward pressure.
Bearish Momentum Identified
Figure 3 illustrates the medium-term and major trend phases of USD/JPY as of January 16, 2025 (Source: TradingView).
The daily RSI momentum indicator for USD/JPY has recently indicated a bearish divergence in the overbought region since January 8, 2025, and has just crossed below the 50 line.
These insights imply that the medium-term uptrend stemming from the September 16, 2024 low of 139.58 is at risk of transitioning into a potential multi-week corrective decline phase.
Focus on the pivotal medium-term resistance around 158.35/80; a breach below 152.90 (the 200-day moving average) could trigger a corrective decline, exposing next support levels at 149.30 and 144.80 (see Fig 3).
Conversely, a breakout above 158.80 would negate the bearish outlook and potentially push prices back up towards crucial resistance levels at 160.30 and 161.70.
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