USD/JPY, Gold: Yen, precious metals sink as US bond yields surpass election peak

US Treasury yields spike, driving USD/JPY higher and precious metals lower
Bond market volatility intensifies as traders demand more compensation
Long-dated yields surge while short-dated yields ease after inflation data
Powell's speech and inflation figures pose major risks for bond markets

Overview

US Treasury bonds are getting hammered again in Asia, pushing 10- and 30-year yields above the US election day highs. For rate-sensitive assets like the Japanese yen and gold, this is bad news.

US long bond yields surpass election highs

The chart below shows US 2-, 10-, and 30-year Treasury yields from left to right, with the rolling change over the past 24 hours beneath each.

Source: TradingView

The bond selloff started overnight after the US October inflation report reignited hopes for another Fed rate cut in December. While this sent shorter-dated yields lower, long-dated yields surged with corporate debt issuance contributing to the move.

Looser monetary policy may boost future economic growth and inflation is one angle, so too the prospect of highly expansionary fiscal policy under Trump administration. Bond traders are therefore understandably demanding more compensation to fund the US government.

Higher US yields crush JPY

The rise in US long bond yields is key for USD/JPY moves, as highlighted by the analysis below.

Source: TradingView

Over the past fortnight, the correlation between USD/JPY and US 5- and 10-year Treasury yields has been 0.96 and 0.95, respectively. That means USD/JPY almost always moves in line with yields. As they have risen, USD/JPY has marched towards the multi-decade highs struck earlier this year. The latest push broke 155.36, a level that acted as support and resistance in July. Momentum indicators like RSI (14) and MACD have also flashed fresh bullish signals.

Given the price action and momentum, a bullish bias is favoured. One trade setup would be to buy now or towards 155.36 with a tight stop beneath for protection. Targets include 160.23 and 161.95, the latter the YTD peak.

Source: TradingView

Gold wilts after breaking uptrend support

Gold isn't enjoying higher yields or stronger US dollar, sinking to fresh lows in Asia. Its moves are closely tied to US Treasury yields, especially the short end of the curve. Over the past fortnight, its correlation with 2-year yields has been -0.91. That means it's usually moved in the opposite direction to yields.

Source: TradingView

Gold's latest lurch lower may also be explained by technical factors after slicing through uptrend support established in June. With RSI (14) in a downtrend and MACD confirming the bearish signal, it remains a sell-on-rallies play.

Unless you’re an intraday scalper or long-term investor, no trade stands out from a risk-reward perspective right now. However, if we were to see the price push back towards the June uptrend, it would provide a decent setup, allowing for shorts to be established with a stop above for protection. $2531.81 would be the initial trade target, a resistance level that capped the price for several weeks earlier in the year

Source: TradingView

Managing event risk

As for upcoming risks, Federal Reserve chair Jerome Powell is set to speak later in the session. Known for his dovish stance, traders may position for such an outcome ahead of his appearance at 3pm ET. Beforehand, US producer price inflation data will be released, offering another risk event of note for traders. Combined with Wednesday's CPI, the report will give insight into likely trends for the Fed's preferred inflation measure – the core PCE deflator due later this month.

-- Written by David Scutt

Follow David on Twitter @scutty

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.