USD/JPY, Nikkei 225: Yen Slides, Equities Eye Breakout on Rising US Yields

USD/JPY hits fresh highs as US yields spike
Yen weakness push Nikkei 225 futures towards key resistance
Fed and BoJ rate decisions on Wednesday and Thursday respectively
Bullish setups emerge for both USD/JPY and Nikkei 225 futures

Overview

The upside move in benchmark US Treasury yields anticipated in last Friday's USD/JPY outlook has materialised, lifting the pair to fresh weekly highs. The tight interplay between technicals and correlations remains intact, despite the backdrop of significant risk events. This dynamic offers a potential framework for setups in the coming week.

The yen's weakness has also caught the attention of Nikkei 225 traders. Improving corporate earnings prospects are beginning to counterbalance concerns about US President-elect Donald Trump's proposed tariff measures, generating near-term tailwinds for Japanese equities.

Bond bloodbath boosts USD/JPY bulls

Last week was a bloodbath for US bonds, especially at the long end of the curve. Benchmark 10-year Treasury yields spiked 24.6bps, sending them to within touching distance of the highs struck immediately after Donald Trump’s victory in the US Presidential election.

Source; TradingView

A 16bps reduction in the scale of rate cuts expected from the Fed by the end of 2025 may have been a factor, helping to lift yields further out the curve in anticipation of a hawkish cut on Wednesday, but technicals arguably provided the clearest signal on the looming lift in yields.

Technical tea leaves prove accurate

You can see that in the 10-year US Treasury note futures chart, with losses accelerating last week as the price broke through the 200-day moving average and uptrend support dating back to November 15. The rout subsequently stalled at known horizontal support on Friday, further bolstering the message coming from technicals.

Source: TradingView

With RSI (14) and MACD generating bearish signals, the path of least resistance comes across as lower, not higher. At the very least, selling rallies and bearish breaks is preferred near-term.

Note the strong inverse correlation between benchmark Treasury futures and USD/JPY in the bottom pane, sitting at -0.92 over the past month. As price moves inversely to yields, the readthrough is USD/JPY remains highly influenced by the US interest rate outlook.

USD/JPY takes out another resistance level

Source: TtradingView

With US benchmark yields pushing higher, it’s fuelling USD/JPY upside, seeing the price take out resistance at 153.38 on Friday after doing away with the 50 and 200-day moving averages earlier in the week. With RSI (14) and MACD providing bullish signals on momentum, the bias is to buy dips and bullish breaks.

The move above of 153.38 provides a bullish setup for those seeking ideas, with potential pullbacks towards the level allowing for longs to be established with a tight stop beneath for protection. Possible topside targets include 155.89 and 156.75.

If the price were to reverse back through 153.38, potential short setups don’t screen as particularly appealing with the key 200-day moving average located nearby. Unless you’re an intraday scalper, the risk-reward looks skinny.

Nikkei bulls eye range break

The bullish break in USD/JPY may be starting to influence Nikkei 225 futures with the rolling correlation between the two strengthening to 0.75 over the past fortnight, a level only seen once over the past two months.

Nikkei futures have been rangebound for months, limited by buying support below 38000 on the downside and sellers parked above 40000 on the topside.

More recently, however, futures have pushed towards the top of the range, finding support at 39000 and a minor uptrend dating back to late November. With RSI (14) and MACD signalling building topside momentum, traders should be alert for a bullish breakout in the short to medium-term.

Source: TradingView

The uptrend is found around 39450 today, close to where the price closed on Friday evening. If it were to hold, traders could look to buy above it with a tight stop beneath for protection. The price has run into sellers above 40000 the past five times it’s ventured there, making that an obvious initial target.

Alternatively, if the price were unable to hold the uptrend, the bullish bias would be void, allowing for setups to trade the existing range with support located in between at 39000.

Now read: USD/JPY weekly outlook: Fed and BoJ decisions to ignite FX market volatility

-- 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.