The dollar is taking revenge for last year's squeeze when it fell by a record high against other major rivals. Alternative reserve currencies such as the yen and the euro are likely to suffer the most. The upcoming events this week may further strengthen the US currency. On Wednesday, Joe Biden is due to reveal details of the infrastructure spending plan. On Friday, a key indicator on the country's labor market will be released.
The catalyst for the growth of the dollar is now an increase in the yield of treasury bonds. It is unlikely to fall, given the long-term expectations of the market for the recovery of the US economy. Some forecasts suggest that the yield may eventually rise to 2%. One of the most yield-sensitive pairs is USD/JPY.
Traders are now focusing on the widening gap in the yield differential between the two countries – the US and Japan. The spread of "ten-year" yields has widened since the beginning of the year to 1.64 p. from 0.9 earlier. This is the main reason for the current USD/JPY rally, which was no less than 8%.
Thus, the USD/JPY pair broke through at the end of the quarter and the end of the fiscal year in Japan above the mark of 110.00. The USD/JPY rate may rise to 112.20 in the coming sessions, analysts say. Recall that this level was relevant before the outbreak of the pandemic.
Note that market players are waiting for the Japanese Central Bank to clarify the volume of bonds that the regulator plans to buy in April. If it comes to increasing the volume, it will be a similar measure that the ECB adopted in March. This means that the yield spreads may expand further, pushing the yen to new lows. After the mark of 112.00, buyers of USD/JPY will probably want to conquer the area of 114.00-115.00. It is worth noting that in the area of these marks, the pair have turned to decline in the last four years. However, at that time, the spread was relatively higher. At the moment, it reached 3 p.
At the moment, the bullish scenario is strengthening for the USD/JPY pair. Buyers expect to push the quote to the level of 111.70. However, such a move requires stability above the support level of 110.15. In the event of a breakdown, the pair risks going down to 109.20.
The main thing that traders will find out in the coming days is whether the growth in US government bond yields will begin to put pressure on sensitive assets, such as growth stocks, and in general on risk appetite. If the answer is positive, the dollar's growth will expand, increasing pressure on "commodity" currencies and especially on the currencies of developing countries.
By the way, the growth of the yield spread of US and German government securities has been going on since July, as in the case of Japan. It began to exert serious pressure on the EUR/USD exchange rate only from the beginning of this year. This contributed to the fall of the euro against the dollar from 1.2330 in January to 1.1700 at the moment. In other words, in the first quarter, the main Forex pair sank by 5%.
The spread has returned to pre-pandemic levels, and it is very far from the peak values of the end of 2018. At that time, it reached 2.8 p., stabilizing a little later at 2.4 p.
We do not claim that the EUR/USD pair can lose another 5% of its value, falling to the area of 1.1100-1.1200. Most likely, the euro will lose sensitivity to these changes. In this case, it can find support in the area of 1.1500 or slightly lower.
It is also important to note that the difference in the approaches of central banks remains very large. The Bank of Japan and the ECB are talking about more leniency, while the Fed prefers to ignore what is happening. This means that the dollar will continue its offensive upward movements against the yen and the euro in the near future.
The EUR/USD pair rose slightly today on a small pullback of the US currency. However, the trend remains bearish and the sellers' target is the mark of 1.1605. This scenario development may again lose relevance in the event of a breakdown of the resistance level of 1.1780.
