Along with USDCNH, USDJPY has the strongest correlation with the US 10-year Treasury yield, which has moved from 1.43% in August to 1.97% (54 basis points) on 7 November. Taking USDJPY into 109.48. Having retreated a touch into 1.83% (taking USDJPY into 108.24), we’re seeing bond traders re-assess positioning. Should we see a closing upside break of 1.94%, I would expect the benchmark Treasury to test 2.12% and potentially 2.2%.
USDCNH (yellow – inverted) vs UST 10yr
Given the correlation with USDJPY, a break of 1.94% in US 10s, should, therefore, see USDJPY close through the 61.8 fibo retracement of the April to August sell-off at 109.33, which we can clearly see as strong horizontal resistance. A break of 109.33 takes the pair into 110.50/111.00, although, I am a willing seller into here.
USDJPY – purple, US 10yr – candle chart
See the daily chart. The purple line highlights the 61.8 fibo, which promoted the failed break on the 7th and 8th. It is the line in sand for me, and psychologically a closing break would be meaningful..hence putting on the radar.
Consider that one of the big debates in macro-discretionary trading circles at present is how much higher bond yields can go and whether the move higher has been predicated more on a better feel on US-China trade relations or better global economic data.
Either way, traders certainly do not want to be long bonds (short USDJPY by proxy) if we hear a positive and tangible outcome in the talks. That would take the 10-year through 1.94% (USDJPY 109.33).
YTD regression between USDCNH (independent) and US 10YR. R^2 sits at 0.85
Of course, the risk of disappointment is elevated, and I, like many are sceptical that we see the September US tariffs (Stage 4) rolled back, let alone the tariffs due to kick in on 15 December.
An outcome China has made clear they need to see before they will commit to agreeing to a ‘Phase One’ deal and a sizeable amount of US agricultural products. One suspects Trump will be keen to meet the market, which is a risk if short.
That said if short, the idea to square and reverse into long positions on a daily close through 109.33 seems highly prudent.
Short positioning, held by large speculators (or ‘non-commercials’) in the JPY has increased to 34,997 contracts, showing the big money is moving into short JPY exposures. However, considering this is the 59th percentile of the three-year range, one could consider positioning as quite neutral.