Forex Market: USD/JPY near highs unseen since October 1998 as US-Japan bond yield spread widens

USD/JPY scaled a fresh 23 1/2-year high on Monday, since the spread between US and Japanese bond yields widened following last week’s red hot US CPI inflation report.

Monetary policy divergence in Japan and overseas has already become quite evident. While Bank of Japan continues sticking to ultra-accommodative policy, the Federal Reserve is expected to hike interest rates at its policy meeting this week in order to curb inflation.

Markets are now pricing a nearly 70% chance of 125 basis points of hikes at the Fed’s June and July policy meetings, after May CPI inflation exceeded market expectations.

The yield on benchmark US 10-year government bonds rose as high as 3.2% earlier on Monday after a 12 basis point rise on Friday.

On the other hand, Bank of Japan said today that it would buy 500 billion yen of Japanese government bonds on Tuesday, as it aims to keep benchmark 10-year yields within 0.25% of its 0% target.

“For the yen, what could go wrong did go wrong, and continues to go wrong,” Paul Mackel, global head of FX research at HSBC, was quoted as saying by Reuters.

“The big thing now is whether the domestics begin to change their so-called FX hedge ratio, which could lead to more persistent demand for foreign exchange versus Japanese yen. If so, that keeps the currency on a weakening path, or at least stops it strengthening.”

As of 9:10 GMT on Monday USD/JPY was inching up 0.01% to trade at 134.408, having risen in each of the past six trading days. During Monday’s Asian trading session, the major Forex pair climbed as high as 135.20, which has been its strongest level since October 5th 1998 (136.06).

USD/JPY has risen 4.47% so far in June, following a 0.96% drop in May.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 134.08
R1 – 134.79
R2 – 135.20
R3 – 135.91
R4 – 136.63

S1 – 133.67
S2 – 132.96
S3 – 132.55
S4 – 132.15