USD/JPY - Only 2-yr treasury yield can do the heavy lifting

USD/JPY’s drop below 100.00 levels once again proved to be short lived, courtesy of the hawkish Fed talk.

BOJ – Is the game over?

Since the beginning of the current year, we have seen BOJ policy moves back fire. First the negative rates, then the talk of QE expansion followed by a failure to deliver highlights the game might be over for the BOJ.

Stock market pull back to support Yen

Furthermore, stocks are at record highs. From here, the odds of a pullback are higher than the continuation of the rally. Moreover, the pullback would further strengthen the bid tone around Yen.

Hence, US Fed is the only game in town which could, via rate hike, lift the Dollar-Yen pair. The 2-yr treasury yield is closely tied to the short-term rate hike expectations. Thus, we can conclude that only a rise in the 2-yr Treasury yield could result in USD/JPY rally.

NY Fed’s Bullard’s hawkish comments yesterday helped boost the 2-yr treasury yield and as we can see the Dollar-Yen pair has followed suit in Asia.