The USD/JPY pair is increasingly influenced by US Treasury yields, Nasdaq movements, and market volatility, overshadowing traditional drivers like Fed and Bank of Japan (BoJ) decisions. A midweek drop in US Treasury yields, driven by weakening sentiment towards AI investments, pushed USD/JPY out of its recent trading range. However, sentiment stabilized by Friday, partially reversing the declines and delivering a bullish signal on the daily chart.
Earnings updates from AI-related companies, particularly the major hyperscalers, may have a significant impact on USD/JPY in the coming weeks. Traders are focusing on guidance regarding AI capital expenditure and expected returns on these investments, which have already been heavily priced into markets.
The correlation between USD/JPY and US 10-year Treasury yields has strengthened, reaching +0.97 over five sessions. Similar correlations are seen with Nasdaq 100 futures and an inverse relationship with VIX futures. This shift suggests that markets are now more influenced by AI sentiment than crude oil movements.
US Treasury yields have fallen sharply over the past two weeks, with the 10-year yield declining by 25.6 basis points. The spread between two and 10-year yields has flattened by 14.7 basis points, reflecting reassessments of the US growth outlook due to doubts about AI investment returns. The Fed is expected to leave rates unchanged this week, with only a 12% probability of a 25 basis point hike. The BoJ is also expected to hold rates, with markets favoring a December hike.
Economic data releases, such as Japan's underlying inflation measures and the US Q3 GDP estimate, may take a back seat to broader market sentiment. Technically, USD/JPY found support at 156.68, with bulls defending the level and delivering a dragonfly doji pattern. Immediate support levels are at 156.68 and 156.05, with a more pronounced support zone between 155.50 and 155.00.