From the Desk of Ian Culley @IanCulley
The USD/JPY is breaking out.
I can’t think of a stronger trend than the dollar-yen last year. It absolutely ripped to the point we were joking everything priced in yen looked good – even gold!
But it wasn’t the only market trending higher at the time. The US dollar and interest rates also rallied together.
Today’s USD/JPY strength raises a painful question for many investors…
Will interest rates and the US Dollar Index $DXY follow?
Before we delve into the broader implications of a USD/JPY rally, let’s outline the setup for those who trade forex markets.
Check out the dollar-yen reaching its highest level since November 2022, completing a six-month consolidation:
The breakout level stands at 137.50.
As long as it holds above that level, I like trading the USD/JPY from the long side with an initial target of 142.50. But I want to witness an overbought reading greater than 70 on the 14-day RSI for added conviction.
On the flip side, all bets are off if the USD/JPY slips back within its prior range.
It doesn’t matter if you trade this dollar pair or not. The upside resolution in the USD/JPY carries implications for the dollar and interest rates.
Yes, it’s the dollar and rates again.
We’re almost six months into 2023, and key themes from last year’s markets are creeping back into the foreground.
Here’s a triple-pane chart of the USD/JPY, DXY, and the US 10-year yield:
The chart may look familiar, as the strong relationship between these markets was a hot topic last summer.
The Japanese government is one of the world’s largest holders of US Treasury bonds. Combine that with the Bank of Japan’s yield curve control policies and the Federal Reserve’s aggressive rate hikes… and voila!
These three charts have practically moved tick for tick since.
Notice the USD/JPY and the US 10-year yield peaked on the same day last October, less than a month after the US dollar index. Also, note all three have carved out potential reversal formations over the past six months.
The lone exception: The USD/JPY is completing a bearish-to-bullish reversal.
I imagine the strong positive correlation between these markets ultimately dissolves. Correlations come and go. But I doubt these markets will decouple in the coming weeks and months.
Instead, the higher probability outcome points to these lines resolving in the same direction.
If the USD/JPY continues to rip higher…
We’re likely dealing with a strong dollar and rising rates – two key ingredients to last year’s sell-off.
Thanks for reading.
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