The rapid rise in US Treasury yields has forced the Japanese yen to look for a place to hide. US Federal Reserve Chair Jerome Powell did not want to express concern about the rally in US debt market rates; Senate Majority accepts Joe Biden's $1.9 trillion fiscal stimulus draft; and OPEC's reluctance to increase production inflated oil prices and inflation expectations. Reflation trading moves around the planet, keeping currencies with low interest rates in the black body.
The Fed chairman would have worried about the rise in Treasury yields if it were sustained, and the markets were in serious turmoil, which would have tightened financial conditions. Rumors are growing in Forex that the Fed will intervene if stock indexes begin a serious correction, and corporate debt rates rise as rapidly as government debt. Until that happens, the yield on 10-year Treasuries could rise as much as 2%. The speculators, who were getting rid of bonds at a record pace, are well aware of this - they cut net longs by $45 billion in the week to March 2.
Dynamics of speculative positions on US bonds
The Fed's passivity, rising energy prices, which increases the risk of inflation acceleration, the need to increase emissions due to additional fiscal stimulus, and belief in a bright future for the US economy are forcing investors to ditch US Treasuries and lead to higher yields when the price falls. Taking into account the fact that the Bank of Japan intends to defend the target range of rates on 10-year local securities at +/- 0.2% by all means, the widening of the yield differential for US bonds and their Japanese counterparts leads to an increase in the USD / JPY quotes. They have reached their maximum since June 2020, and it seems that the bulls are not going to stop there.
Let's not forget that the current situation in the US securities market is helping to increase the attractiveness of American assets and the flow of capital from Asia to America. Indeed, the yield on Treasury bonds, taking into account hedging of currency risks for Japanese investors, has reached its highest level since 2014. Few believe that the S&P 500 will go into a major correction because against the backdrop of a potential expansion of the American economy by 7% in 2021, this would be a paradox. A stock index rollback creates a favorable opportunity for foreigners to enter longs.
Thus, widening yield differentials, the explosive growth of the US economy, and the increasing attractiveness of US assets open the way to the upward trend for USD/JPY.
Technically, on the weekly chart of the analyzed pair, there is a "Deception-Outlier" pattern. An unsuccessful test of the lower border of the consolidation range 105-114.4 with a subsequent return of quotes to its middle is a signal for buying. The targets set in the previous article worked out, we continue to open longs in USD/JPY with targets at 110.0, 112.5, and 114.4.
USD/JPY, weekly chart
