10 year Treasury and USD/JPY
From Friday’s 2.090 close and to move higher in terms of averages from 1 – 25 years , the 10 year Treasury yield must first break the 1 year average at 2.158, the 3 year average at 2.302, the 5 year average at 2.356 then back to the misplaced 2 year average at 2.407. Above 2.40 , the price path is clear to the 10 year average at 3.174 and the 15 year average at 3.615. Last time price saw 3.00 on a monthly close was 50 months or 4 years, 2 months. Yet price closed above 2.0 exactly 25 times in the last 28 months. and explains how the 2 year average became misaligned as it crossed below the 3 and 5 year averages.
What dictates current prices at the shorter averages are the 1 year due to 2.158 , the 2 year due to its misalignment and the 10 year at 3.17 due to its distance. The 2 and 10 year averages are oversold and become more oversold on any price drops while the 1, 3 and 5 year averages are literally at perfect balance and seek direction from the 2 and 10 oversold condition. The 1 year average price extremes to place the averages in context are located at 1.66 – 2.64 while the 3 year average price extremes are found between 1.206 and 3.39. The 2 year extremes are found between 1.523 – 3.29. Price extremes are seen in Non Farm Payroll type events and rarely hold their levels Price extremes inform the 2.40 average at the 2 year will struggle to break higher near term.
Longer term averages from 10 – 25 years are located at 3.174, 3.615, 4.201 and 4.762. All averages resemble the 2 and 10 year oversold condition as lower prices sees those averages become more oversold. Ranges are wider on longer term averages so ability to meet the extremes on the shorter term averages is quite easy.
To align the distribution from 1 – 25 year, price targets must be seen at 1.8442, 1.9368, 1.9954, 2.1130, 2.1391, 2.520, 2.78 and 3.02. Above 3.02, price begins overbought. The further above 3.02 represents various degrees of overbought.
USD/JPY V the 10 year yield retains a 0.1 correlation at the 3 year and barely meets 0.55 from averages between 10 – 25 years. Correlations are negative at the 1, 2 and 5 year averages. The variation is to wide to consider a USD/JPY trade vs the 10 year. One reason is USD/JPY ranges are tight.
The big break for USD/JPY near term is the 1 year average at 119.30 and above at 120.79 and 122.16. The 2 year average at 110.81 is the price driver to determine downside targets and supports since 25 and 20 year averages are located at 109.47 and 108.47. USD/JPY was severely overbought at 124 and 125 but no longer holds severely overbought prices. Instead, USD/JPY prices are fairly balanced. Its slightly overbought long term but oversold Vs 122.16. The more USD/JPY sees tight ranges and consolidation then the better to relieve overbought in longer term averages as they will catch up to current prices. I see both USD/JPY and 10 year yields higher over time yet USD/JPY won’t move higher due to 10 year yields.
Brian Twomey, Inside the Currency Market, btwomey.com