USD/JPY, USD/CNH: US dollar rally gains steam as bond belly belted

• USD/JPY, USD/CNH push higher in Asian trade on Wednesday
• Move coincides with fresh highs for US bond yields between five and 10-years
• USD/JPY smashed through 200DMA, eyes break of key 151.95 level
• USD/CNH gains capped as bullish momentum wanes

Overview

USD/JPY and USD/CNH remain heavily influenced by the US Treasury market, where rising yields are boosting the dollar’s yield advantage over both the yen and yuan. Given the ongoing trends in both rates and FX markets, the path of least resistance for these currency pairs continues to point higher.

US rates driving USD/JPY, USD/CNH moves

There’s little doubt the US interest rate outlook is dominating the FX market moves, including for USD/JPY and USD/CNH given they are among the funding currencies of choice for carry trades given their comparatively low interest rates.

For USD/JPY, whether you’re talking about moves at the front-end, belly or back-end of the US interest rate curve, the correlation coefficient scores over the past month range from 0.92 to 0.95 on a daily timeframe. Near lockstep directional moves, in other words. Similar scores are also evident for USD/CNH, ranging from 0.84 to 0.88.

Source: TradingView

A correlation coefficient measures the strength and direction of the relationship between two variables, ranging from -1 to 1. A score of 1 means they move perfectly together, -1 means they move in opposite directions, and 0 means no relationship. The closer the score is to 1 or -1, the stronger the relationship.

The short-end, belly and long-end explained

The front-end of the interest rate curve refers to short-term bond yields, typically with maturities of up to 2 years. The belly covers medium-term bond yields, usually between 3 to 10 years, which tend to reflect expectations for growth and inflation. The back-end is longer-term bond yields which incorporate expectations for economic growth, structural factors such as demographics and government debt levels, along with increased uncertainty.

Dollar rally sparked by belly belting

While the relationship between USD/JPY and USD/CNH with US yields across the entire US curve has been strong over the past month, when looking at the price action in the yen and yuan on Wednesday against the US dollar, the latest rally corresponded with fresh highs being printed for US 5 and 10-year yields. While yields across all tenors were moving higher, two and 30-year yields remained below the levels stuck during the North American session.

Source: TradingView

Granted, it’s an extremely limited timeframe, but it will be worthwhile keeping an eye on moves in the belly of the US curve to see whether they continue to lead USD/JPY and USD/CNH. If correct, it implies they are not being driven purely by Fed interest rate expectations but other factors, including fiscal policy under the next US government.

USD/JPY chewing through resistance zone

Source: TradingView

Considering how long it took for USD/JPY to get through the levels earlier in the year, it’s remarkable just how rapidly it's chewing through the major resistance zone I’ve written about in recent posts.

It breezed past the 200-day moving average with ease after smashing trough 149.75 and 150.90 over the past week. Now it’s staring down 151.95, a major level that capped gains for large periods of time earlier this year.

With the yen move coinciding with higher US yields, the threat of imminent market intervention from the Bank of Japan (BoJ) on behalf of Japan’s Ministry of Finance (MoF) comes across as low, even if we do see some attempts at verbal intervention. Given the prevailing trend, any dip would almost certainly be bought.

If 151.95 were to be broken cleanly, there’s not a lot of visible resistance until 155.375, and even that’s a minor level. With RSI (14) and MACD continuing to generate bullish signals on momentum, a push above 151.95 would create a setup where traders could buy the break with a stop beneath for protection.

On the downside, levels to watch include the 200-day moving average, 150.90 and former uptrend resistance which may now act as support. It’s found around 150.70.

USD/CNH gains capped despite rising US yields

Source: TradiungView

USD/CNH has not broken to fresh highs despite the continue lift in US yields, perhaps reflecting attempts from Chinese authorities to limit weakness in the onshore-traded yuan (CNY) against the US dollar. The divergence between RSI (14) and price is another sign that further upside in USD/CNH may prove to be more difficult than with USD/JPY near-term. 

Right now, USD/CNH rallies are faltering ahead of 7.14935, a double-top established in August. If that were to be broken cleanly, there’s little visible resistance until 7.1800 where the price constantly ran into sellers earlier this year.

On the downside, buyers have been active around 7.1100, a level that acted as both support and resistance over recent months.

-- Written by David Scutt

Follow David on Twitter @scutty