USD/JPY crumbles as Treasury futures surge: key signals to watch

• Treasury yield signals remain the key directional driver for USD/JPY
• Bullish bond futures breakout bearish for USD/JPY near-term
• Selling USD/JPY rallies favoured

Overview

The downside flush in USD/JPY flagged midweek has played out nicely, with the target achieved in less than a session. While the move has received ample attention, it’s not the signal you should be assessing trade setups on right now, nor speculation about what the Bank of Japan will do with rates next month.

Despite the narratives you’re reading and listening too, they are distant secondary considerations. If you want to know directional risks for USD/JPY, focus on directional signals from US Treasuries.

With momentum indicators still pointing bullish for Treasuries, directional risks for USD/JPY remain skewed to the downside.

Bullish bond breakout explains a lot

Through the maze of US data released this week, moves in US bonds can be largely explained by the bullish breakout in futures on Monday. As forewarned by momentum signals beforehand, news that Donald Trump had nominated Scott Bessent as treasury secretary was the fundamental catalyst, combining with robust demand for auctions of two, five and seven-year Treasury notes to deliver a powerful signal that yields may have topped near-term.

Given its strong negative correlation with US 10-year Treasury note futures, it comes as no surprise that USD/JPY has been hosed, combining with bearish price and momentum signals to deliver a big unwind few saw coming.

Just as Treasury futures broke higher, USD/JPY broke lower, cascading down to the 50-day moving average on Wednesday before bouncing into the close. Now the initial trade setup has played out, it’s time to assess whether to add, hold or reverse?

Bullish bond bias is bearish for USD/JPY

Source: TradingView

From the bond futures side of the equation, momentum signals from RSI (14) and MACD remain bullish, trending higher without being anywhere near stretched. Wednesday’s engulfing candle provides another bullish signal when it comes to directional risks. However, after record volumes were put through on the initial breakout, reflecting the timing of contract roll, volumes underpinning Wednesday's move were pitiful, raising a red flag on the price signal delivered.

While buying dips remains the preferred strategy near-term, new setups must have adequate compensation to account for heightened uncertainty during this low liquidity period heading into month-end. The same thinking also applies to USD/JPY setups.

USD/JPY trade setups

Given bearish momentum signals, the near-term bias is to sell USD/JPY rallies, putting the 200-day moving average on the radar. Even though the price sliced through it like a hot knife through butter on Wednesday, prior price action shows the level is often respected by traders.

If we see USD/JPY squeeze up towards the level, one option would be to initiate shorts with a tight stop above for protection. Possible downside targets include horizontal support at 150.90 or the 50-day moving average.

Alternatively, while it goes against the bearish near-term bias, if the price were to push back towards 150.90, longs could be established with a tight stop beneath the 50-day moving average for risk management. The obvious target would be the 200-day moving average.

-- Written by David Scutt

Follow David on Twitter @scutty