USD/JPY Bulls Get Lifeline as Bond Yields Surge, Reversal Risk Rises

The recent surge in US-Japan yield spreads has been unusually rapid, but it's also provided a supportive backdrop for gains in USD/JPY. Despite this, the pair has fallen sharply over the past two weeks, with some pointing to record intervention and US support as keeping yen strength intact.

A rare widening event has seen US-Japan spreads across various tenors increase at a pace around the 98.5th percentile going back to the late 1990s. In comparable episodes, USD/JPY typically rose around four times out of five, with median gains of 1.3% over the same period.

However, this time around, the pair has dropped by around 2.7% over the past five sessions, putting it in the bottom 3% of comparable episodes. The price action on charts is now raising reversal risk, with a bullish engulfing candle forming after a pronounced leg lower.