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USDJPY Needs Higher Treasury Yields for Gains to ¥85, Eyes on US Fed

By , Quantitative Strategist
03 April 2012 16:00 GMT

Strong correlations between US Treasury Yields and the US Dollar/Japanese Yen pair suggest that US interest rates and Federal Reserve Monetary Policy will decide whether the USDJPY continues its recent gains.

Last month we argued that the US Dollar/Japanese Yen pair had set a long-term bottom on a simultaneous surge in US Treasury Yields. It’s too early to tell whether we were correct in our forecasts, but sharp USDJPY gains suggest fresh lows are unlikely. Yet the US 10-Year Treasury Note yield trades almost squarely at critical support at its 200-day Simple Moving Average.

Whether or not US Treasury Yields rally off of major support may ultimately decide if the USDJPY makes a sustained run towards ¥85.

Forex Correlations Summary

View forex correlations to the SPDR Gold ETF Trust (GLD), United States Oil Fund ETF (USO), SPDR Dow Jones Industrial Average ETF Trust (DIA), UK FTSE 100 Index, and IShares Silver Trust ETF (SLV) prices.

GLD

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.37

0.65

-0.09

0.71

-0.64

0.93

-0.62

1 Month

0.58

0.46

0.06

0.70

-0.63

0.71

-0.60

3 Month

0.38

0.14

-0.18

0.42

-0.17

0.38

-0.45

1 Year

0.18

0.19

-0.13

0.26

-0.19

0.24

-0.28

USO

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

-0.13

-0.12

-0.14

0.57

-0.54

0.62

-0.24

1 Month

0.34

0.44

0.11

0.70

-0.60

0.60

-0.46

3 Month

0.30

0.31

0.16

0.42

-0.44

0.43

-0.32

1 Year

0.49

0.38

0.02

0.64

-0.61

0.56

-0.54

DIA

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.42

0.76

-0.10

0.67

-0.58

0.90

-0.66

1 Month

0.27

0.57

0.52

0.63

-0.72

0.59

-0.31

3 Month

0.35

0.47

0.30

0.60

-0.60

0.48

-0.39

1 Year

0.64

0.55

-0.07

0.80

-0.81

0.75

-0.69

FTSE100

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.09

0.18

-0.26

0.75

-0.69

0.84

-0.51

1 Month

0.31

0.48

0.33

0.71

-0.78

0.63

-0.39

3 Month

0.34

0.36

0.12

0.60

-0.61

0.56

-0.40

1 Year

0.46

0.37

-0.03

0.70

-0.66

0.65

-0.57

SLV

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

-0.03

0.59

-0.60

0.98

-0.95

0.97

-0.89

1 Month

0.45

0.49

0.07

0.83

-0.84

0.84

-0.60

3 Month

0.48

0.36

-0.19

0.60

-0.43

0.54

-0.60

1 Year

0.33

0.30

-0.09

0.41

-0.37

0.38

-0.41

Perfect Positive Correlation:

1.00

Perfect Negative Correlation:

-1.00

forex_trading_correlations_us_dollar_treasury_yields_body_Picture_1.png, USDJPY Needs Higher Treasury Yields for Gains to ¥85, Eyes on US Fed

US Dollar/Japanese Yen Exchange Rate (lhs)

US 2-Year Treasury Note Yield (VIX) (rhs)

Correlation between US Dollar/Japanese Yen and US 2-Year Treasury Note Yield

The correlation between the US Dollar/Japanese Yen and US Treasury Yields remains strong, and the noteworthy link suggests that yields will have to rise further for similar USDJPY strength. Several weeks ago we argued that the USDJPY had set a major bottom on a similar floor in US Treasury Yields. And obviously we can’t know for certain that both Treasury yields and the USDJPY have bottomed, but sharp rallies suggest fresh lows are unlikely.

Yet the USDJPY rally has stalled just short of 2011 highs near ¥85, and recent forex futures positioning warns that the pair could correct lower. The ultimate driver of US Dollar moves against the Yen may nonetheless come on Treasury Yields, and indeed this leaves focus on the US Federal Reserve and its next monetary policy moves.

Keep a close eye on Federal Reserve rhetoric and this week’s pivotal US Nonfarm Payrolls report. Given the strongest quarterly performance in the Dow Jones Industrial Average since Q1, 1998, Friday’s NFP data could decide the fate of the US Dollar and other highly-correlated markets.

For the USDJPY? Any sharply worse-than-expected NFP data would likely sink the US Dollar versus the resurgent Yen.

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To contact David, e-mail drodriguez@dailyfx.com

To be added to David’s e-mail distribution list for this and other reports, e-mail subject line “Distribution List” to drodriguez@dailyfx.com

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03 April 2012 16:00 GMT