USD/JPY: US-Japan 10-yr yield spread at 12-week high, risk reversals slide

The rally in the USD/JPY pair appears to have run out of steam around 113.00 handle, however, the US-Japan 10-yr yield spread is showing no signs of slowdown.

Yield spread

• The spread currently stands at 228 basis points [bps]; the highest since July 7. The widening yield spread signals the Dollar-Yen pair is likely to remain bid and could break above 113.00 levels.

Risk reversals drop

• The one-month 25-delta risk reversal gauge dropped to -1.90; the lowest level since May 29. It indicates heigtened demand for Put options.

While the yield differential favors a break above 113.00 in USD/JPY, the risk reversals gauge shows the investors are hedging against a potential pull back in the USD/JPY pair.