Bond Bloodbath Hands USD/JPY Bulls a Lifeline Amid Unusual Market Action
The USD/JPY pair has fallen sharply over the past couple of weeks despite a strongly supportive rates backdrop, but a recent bond bloodbath has handed bulls a lifeline. US Treasury yields have backed up sharply from their late-August lows due to higher energy prices, firmer inflation pressures, and rising expectations for a Fed rate hike.
The widening US-Japan yield spreads at a historically rare pace is typically supportive of gains for USD/JPY, but the pair's recent performance has been highly unusual. Over the past five sessions, US-Japan spreads have widened at a pace that sits around the 98.5th percentile going back to the late 1990s.
The bullish engulfing candle on Thursday raises reversal risk, particularly as it comes after a pronounced leg lower. If USD/JPY remains capped beneath 154.45, the logical target would be a retest of the double bottom beneath 153, with 152.90 where the pair stalled on Tuesday.