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Chart of the Day: USDJPY and its 2yr rate differential

Today we’re looking at a key relationship between USDJPY price action and the US-Japan 2-year bond yield differential. The pair has diverged since September, suggesting that should traders focus on the bond market, as a driver, we could argue there are downside risks to USDJPY. The question is: when could it take effect? Price action will reveal all, as always.

USDJPY daily chart

The US-Japan 2-year rate differential is the spread between US and Japan 2yr bond yields. If US yields rise faster than Japan’s (white line higher), we typically see USDJPY move in appreciation (red line higher). You can see the pair have diverged since September, suggesting USDJPY might be ‘expensive’ relative to one of its traditional drivers.

Trade tensions have been the major driving force this year, so we are not surprised to see the pair diverge from normality as the trade outlook has become increasingly murky. Sunday 15 December is a key date, when markets will learn whether or not the 15% tariffs on $160b worth of goods are enforced.

The divergence between USDJPY and its 2-yr rate differential could persist until trade tensions clear up, and that’s unlikely to happen soon. If USDJPY is overpriced relative to the rate differential, it could be a hard and fast fall toward the 105.00 level.

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