USD/JPY surged to a fresh one-month high of 119.90 after breaking yesterday’s peak at 119.22 during Asian trade. This extends the gains seen since last Friday’s solid U.S. employment report, which boosted the dollar’s yield advantage versus the yen and other currencies. The dollar bias should continue to be toward a higher exchange rate as Abenomics policies are for a weaker yen and US yields are rising.
U.S., Treasury yields surged higher in response to the job data which increased the chances for rate liftoff in June and weighed heavily on shorter dated notes. The strength in wages and the rebound in oil prices also suggested a whiff of inflation too which hurt the long end. The 10-year yield jumped and closed the Tuesday trading session above 2%.
This helped push the yield differential between the US and Japan to the highest levels seen in the past two months at 175 basis points but still well below the 225 basis points that were seen between the two sovereign bonds one year ago.
Fedspeak will be closely monitored for hints on the policy course, though we doubt there will be any signs give the official mantra is data dependent. Fed hawk Fisher will discuss the economy on Wednesday and Friday.
Economic data releases in Japan will slow mid-week for a holiday, but releases pick up again with December machine orders on Thursday which are expected to pull back to a 0.5% month over month clip from 1.3% in November. January PPI on Thursday is forecast to cool to 1.7% year over year from the prior 1.9%.
The USD/JPY broke out above a downward sloping trend line and is likely to test resistance near the November highs at 121.70. Support is seen near the recent breakout at 119.25. Momentum is positive as the MACD (moving average convergence divergence) index recently generated a buy signal.