USD/JPY and 10 Year Yield: Levels, Ranges, Targets

USD/JPY and the 10 year yield Correlate at the 1 year monthly average at 89% and not an unusual reading for a 1 year average however at 89% warns a Correlational top is near. The top hits a brick wall at 96%. The bottom correlation scale runs to + 52% then on a break the correlation turns negative.
A Correlation in total is a + 1.0 to minus 1.0 scale. The positive side travels from +50 to +1.0 while the negative bottom scale extends from minus 50 to minus 1.0. Rarely, if ever, will + 1 or minus 1 ever calculate due to the interrelationship between 2 prices. Rho informs this statement is true but RHO also instructs the 1 year USD/JPY V 10 year yield Correlational range is located from minus 65% to +97%. A currency pair for example to hit its brick wall at 97% and drops to 52% amounts to roughly a 200 pip move. USD/JPY above 111.40 is already out of range at the 1 year average.
From 89% at the 1 year average, the Correlation then drops to +52% at the 2 year monthly average and extends downward to + 19% at the 6 year. From the 7 to 9 year, the correlation turns negative and + 11% at the 10 year and dates to 2007. The Slope is positive from the 1 to 6 year and explains the positive correlation while the 7 to 9 year Slope is negative and reveals why negative Correlations.
The 10 year to travel higher from the 2.25 close must break 2.26, 2.41, 2.51 and 2.68. Lower means breaks at 2.24, 2.14, 2.09 and 2.06. What drives the USD/JPY and 10 year relationship is the 1 year average at 2.09 and 2 year at 2.06.
The average distance for the 10 year Vs USD/JPY is 11 points. Part of the paltry 11 point range is explained by not only positive and negative correlations but positive and negative slopes. The 10 year is trapped inside its range. Note the 2.25 close Vs immediate break points at 2.24 or 2.26. The 10 year closed dead center.
Range containment is forcing massive pressures upon current prices which means the 10 year must move. The next move is lower to the 2.14 and 2.09 area. Before the 10 year moves higher, price pressures must resolve itself therefore higher will take time.
From December’s 2.64 high to current May 2.16 lows at 48 points averages to about 10 points per month and fits exactly against the 11 point average range. An 11 point range for a yield at the top of the yield curve is quite stunning and reveals how dead are markets. An 11 point range factors to 0.5 per day in a 20 day trading month.
Brick walls for USD/JPY are located at 112.49, 112.64, 113.12 and 113.31. Most immediate is 111.40. Above 111.40 and 113.31 then USD/JPY is out of range. Out of range can only see 114.20, 114.89 and 115.41. I wouldn’t look past 113.31 as a target anytime soon. What is seen in USD/JPY is the same price pressures as the 10 year yield. USD/JPY at current price is to high. Below break points are located at 110.39, 109.60 and 109.34.
Why high volumes and interest in USD/JPY is due to competition in monetary policies. One side is the Fed’s hopes and dreams to raise while the BOJ embarks on an uncertain Yield Control experiment. Failure or success on either side will see high USD/JPY volatility.
The lesson in a monthly forecast 3 days before the new monthly data is not a good idea. Monthly forecasts are factored and traded upon new monthly data. View my many EUR/USD Vs DXY monthly forecasts for its accuracy and to highlight the value why monthly forecasts work at monthly starts. Because markets are currently dead, only slight changes should be seen in levels.
Other methods exists to view currency prices against yields. The yield not to view is the 10 year because its distance is far far away and because the range is dead. What actionable information does a dead 10 year range impart to lower yields. Accepted as gratis is the 10 year is the mid point when in actuality the mid point is the 5.5 year yield. A yield spread strategy requires understanding in each nations yield orientation, position and location. What appears uniform is never actuality. Then comes distance between yields, Correlations, which yield to trade against and yield crossover to each other. The 3rd cousin to the currency price is not an easy task to master.

Brian Twomey


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