Monitoring for Turning Points
In early 2024, USD/JPY tracked US yields closely, but this correlation abruptly changed mid-year. During this shift, the pair aligned more with higher-risk assets, indicating that carry trade flows were driving it upward. While USD/JPY rose, declining US yields were largely overlooked. However, as the Bank of Japan (BoJ) began raising rates and US economic growth slowed, this led to a sharp unwinding of USD/JPY positions.
This pattern is not guaranteed to repeat, but if USD/JPY diverges from US Treasury yields in the coming year, it could suggest a potential reversal.
Rate Futures: A Tool for Setup Assessment
Given last year’s significant influence on USD/JPY, it’s important to evaluate the directional risks for yields ahead. US 10-year Treasury note futures, recognized as one of the most liquid contracts worldwide, serve as a valuable tool for this assessment.
Signals from these futures can be harnessed to predict price movements, similar to any other market, providing a framework to understand directional risks for both prices and yields, from both fundamental and technical angles.
Source: TradingView
USD/JPY bulls likely appreciated the late 2024 movements, as futures broke downward from a rising wedge pattern that had been in place for a year. With bearish signals evident in the MACD and RSI (14) on the weekly charts, this suggests the break may be sustained, potentially reopening the door to revisit the October 2023 lows. As Treasury prices traditionally move oppositely to yields, this bearish trend indicates upward risks for the 10-year yields.
The USD/JPY chart below illustrates how this bearish trend supports further upside for USD/JPY.
USD/JPY Scenario Analysis
Source: TradingView
Instead of providing a definitive prediction for USD/JPY in 2025, it’s more productive to explore scenarios that could lead to upward movement, range trading, or a downward reversal from current levels. When this report was written in late December, price and momentum indicators were showing an upward trend, suggesting a tendency to buy on dips and favor bullish movements if those trends continue.
Currently, a retest of the multi-decade high at 161.95 seems likely from a technical standpoint.
For this scenario to unfold fundamentally, expectations for Fed rate cuts would need to diminish significantly, with a transition from anticipating cuts to expecting hikes creating a more powerful market influence. However, if the inflation risks previously mentioned do not materialize, pushing USD/JPY higher may prove challenging. Additionally, a sharp rise in US unemployment could trigger a notable decline, intensifying the risk of forced carry trade unwinds.
Threat of BoJ Intervention
Finally, the potential for BoJ intervention requires consideration, as similar actions were taken multiple times last year at the behest of the Japanese government. Japanese officials often highlight the risk of intervention, particularly amid significant yen weakness; however, historical patterns suggest that it is the speed of currency movements rather than specific levels that typically triggers threats escalating to concrete interventions.
It’s crucial to note that intervening while US Treasury yields are on the rise tends to be ineffective beyond the very short term, as it merely creates advantageous levels for bulls to re-enter the market. Given that the BoJ does not possess infinite foreign reserves to counteract fundamental trends, intervention during a period of declining US yields is likely to produce far more effective and lasting results.
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