The yield of 10-year US government bonds has come close to three percent. Today, this indicator reached the level of 2.996%, updating the multi-month highs. The last time the indicator was at similar heights in November 2013 (maximum was fixed at 3.026%), so today's dynamics provide substantial support to the US currency.
In turn, the yen continues to lose its appeal amid a decline in geopolitical tensions. Dollar bulls seized the initiative in almost all currency pairs, however, the USD/JPY pair is growing not only due to the strengthening of the American currency. The yen is under the yoke of the fundamental background, and only its status as a protective asset kept it from a large-scale weakening. Now the market has increased the appetite for risk, and the Japanese currency, in turn, has lost its last trump card.
But let's start with the euphoria of the dollar. The basic reasons for the increase in the yield of Treasuries and, consequently, of the American currency can be divided into two parts. First of all, we are talking about geopolitical factors. Over the past ten months, the world often enough talked about the threat of a World War III. Initially, these concerns were related to North Korea, and this year the Syrian problem has significantly worsened. The global media first discussed the range and trajectory of North Korean missiles, and then the possible reaction of Russia and Iran to a military strike against Syria. Each prospective scenario did not exclude the option of a full-scale military conflict with all the ensuing consequences. According to some experts, the world was on the threshold of a new Caribbean crisis, when the nuclear powers were at the peak of their confrontation.
The months-long pining geopolitical tensions reflected the dynamics of the US currency. In the first quarter of this year, the dollar index fell by two percent. After all, do not forget that, in addition to the North Korea and Syria, there is also China, with whom Trump entered into a tough fight. Therefore, when the market appeared hope for a "happy end", the effect of the "compressed spring" worked. In late March and early April, the pressure on the dollar reached maximum tension, and as soon as it weakened, the spring instantly rebounded: the dollar began to regain the ground it lost.
Last week, dollar bulls felt support from North Korea and Syria. North Korea is preparing for complete nuclear disarmament, and the war in Syria has remained local, despite the air strikes of the Americans. And on the weekend, the dollar received another reason for its growth: high-ranking officials of the United States and China voiced "cautious optimism" regarding the agreement. Moreover, amid renewed talks in the press, information appeared about the possible visit of US Treasury Secretary Steven Mnuchin to Beijing. In China, they hinted that they were waiting for the U.S. "with open arms," as the face-to-face dialogue would accelerate the achievement of a compromise. In other words, mutual rhetoric has softened noticeably, so there are reasonable hopes for peace in the market.
But the statements of members of the Fed, on the contrary, has become tougher. Weak inflation in the United States did not frighten the Fed officials: practically all the speakers last week expressed confidence in further inflationary growth amid general strengthening of the country's economy. And although the probability of a four-fold rate increase this year is minimal, the sounded optimism does not exclude the implementation of such a scenario. In addition, the current week is rather poor in the context of macroeconomic releases, so the foreign exchange market reacts sharply to indirect fundamental factors.
Thus, the US dollar is now in high demand, according to the principle "buy on the rumor, sell on the facts." Information about a possible deal with China against the backdrop of a decrease in geopolitical tensions pushes up Treasury yield and the cost of the greenback.
But here it is worth noting that if the deal with Beijing collapses, the dollar will again "remember" its numerous problems - from the budgets of the twin deficit, ending the early achievement of the first "ceiling" range for interest rates. While this has not happened, one can utilize the dominance of the dollar, especially when paired with the yen. Japanese inflation after many months of growth again collapsed to a mark of 1.1%, burying hopes for the normalization of monetary policy. The head of the Bank of Japan confirmed these fears yesterday, saying that to achieve the target level of inflation, it is necessary to go "a long way". In other words, the Japanese regulator will retain accommodative monetary policy for a long time, despite the economic growth.
Thus, the consolidation of the monetary policies of the Fed and the Bank of Japan, the decrease in demand for defensive assets and the likely normalization of trade relations between the US and China pushes the USD/JPY pair upward. On the four-hour chart, the main trend indicators show signals about further price growth. The first target of the northern movement is located at the level of 109.35 - this is the upper limit of the Kumo cloud on the daily chart.
