USD/JPY, Yields, Fed Funds: Levels, Ranges, Targets

Despite the Fed hike Wednesday, the raise wasn’t reflected in 0.66 Fed Funds until Friday’s close at 0.91. From 0.66 to 0.91 is significant in one day yet the failure for Fed Funds to trade at higher levels in two days from Wednesday to Friday explains, for the most part, why USD dropped.
Fed Funds should begin to settle in the 0.86 to 0.87 region if past is prologue to borrow against Antonio’s words from Shakespeare’s The Tempest. Further, the non movement in Fed Funds is demonstrated in dead money markets around the world as those markets particularly the G10 in EUR, CAD, JPY, GBP, AUD and NZD failed to trade at levels reflective of a Fed Funds rise. The caveat in interest rates is CAD and JPY are far different currency pairs and far outside the norm from respective counterparts because price triggers are non normal. Fed Fund problems leads to USD/JPY and its severe price consolidation.
This week’s 81 pip range and break points ahead are located from 113.04 to 112.23. Last week’s 303 pip range was 116.28 to 113.25 and actual movements were located at 266 pips from 115.13 to 112.47. At 81 pips, USD/JPY warns not only a significant move ahead but price trades at its lower ranges. Corresponding EUR, GBP, AUD and NZD trade at upper ranges. Most significant is GBP and could easily see the big move. USD/JPY is most especially out of step to EUR/JPY’s weekly 303 range.
Further to Fed Funds and seen in Treasury yields is Treasury 10 and 2 spreads traveled 2 basis points lower from Wednesday to Friday from 1.20 to 1.18. Treasury 10’s to 3 month before and after Yellen dropped a huge 10 basis points from 1.87 to 1.77. A 1.18 USD/JPY informs a higher price to 113.60’s and 120 from 1.77. USD 2 year V Japanese 2 year spreads runs 1.06 positive and negative 1.57 from Japanese to USD. At 1.06 before Fed funds dropped, USD/JPY informs a 115 price and 113.00 after the new Fed Funds rate.
The Fed funds rise not only forced USD/JPY lower but into a massive consolidation zone and seen from yield spreads as well as the 2 year yield alone. If yield ranges are ever restricted, it forces down a currency price because inside yield ranges is where Outright Forwards are traded as well as the respective Forward Points. The vast majority of Outright Forwards are traded yet sold at the 100 day average due to its wider ranges and it explains why a currency price has trouble crossing 100 day averages.
USD/JPY currently sits oversold on its vital break point line at 112.69 with break levels above at 113.62 and 114.56. Oversold USD/JPY means from 114.56, 5 to 20 day averages and 100 day. Below, USD/JPY faces 112.12, 111.85 then the floodgates open to 110.74 and the current base at 109.00’s. USD/JPY and GBP/USD is especially on the watch list for the week with far higher possibilities.


Brian Twomey