The Japanese Government Bond (JGB) market is currently anticipating a potential recovery in the Japanese economy in the second quarter, as the 2-year and 10-year JGB yields have reached their highest levels in over a decade. This development has led to a decrease in the yield premiums of US Treasuries over JGBs in the past two weeks, indicating a potential bearish reversal in USD/JPY.
Despite this, technical analysis suggests that there may still be a medium-term uptrend in USD/JPY. In the short term, it is advised to keep an eye on the key levels of 157.00 and 155.30 on the USD/JPY.
This analysis follows up on a previous report published on 29 April 2024, which highlighted the vulnerability of USD/JPY to a downward squeeze due to rumors of FX intervention. Since the publication of that report, USD/JPY has seen a decline of -5.2%, reaching a low of 151.85 on 3 May after hitting a long-term resistance level of 159.30/160.20 on 29 April.
The decline in USD/JPY is believed to be a result of a potential Bank of Japan (BoJ) FX intervention on 29 April and 2 May, following instructions from the Ministry of Finance (MoF) to sell the US dollar against the yen.
Fundamental factors suggest a potential revival of JPY bulls, despite weaker-than-expected Japan Q1 2024 GDP data. The JGB market has shown resilience, with both short and long-end yields trading higher. The 30-year JGB yield, a gauge for long-term growth and inflation trends, has reached its highest level since April 2011. The 2-year JGB yield, which reflects BoJ’s monetary policy stance, has also increased to its highest level since June 2009.
The recent increase in JGB yields has outpaced US Treasury notes, leading to a narrowing of the yield spread premium between US Treasury notes and JGBs. This could potentially make US Treasury notes less attractive for Japanese insurance companies, prompting them to shift their fixed-income portfolio towards JGBs.
On the other hand, medium-term momentum factors suggest potential weakness in JPY. Technical analysis indicates that the medium-term uptrend in USD/JPY remains intact, with price actions oscillating within an ascending channel. Short-term technical elements are mixed, with key resistance and support levels identified for USD/JPY.
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