FX

USD/JPY drops for the first time in eight days after hitting highest levels since October 2020

  • USD/JPY dropped for the first time in eight days after hitting its highest levels since October 2020.
  • The US dollar fell following downbeat NFP data, but yen was weighed by higher US yields and risk on.

USD/JPY posted its first day in the red in eight, after the USD slumped to the bottom of the G10 FX performance ranking following a not so stellar January NFP report. Prior to the data, the pair had advanced above the 11 November 2020 high at 105.677 to hit highs in the 105.70s (the pair’s highest levels since October 2020), but then sharply reversed lower into the 105.30s, where it currently trades now. The pair closed Friday trade with very mild losses on the day of around 0.1% or slightly more than 10 pips. On the week, the pair is still up more than 0.5%.

Driving the day

As noted, a key reason for Friday’s reversal from highs in the 105.70s back to the 105.30s in USD/JPY was as a result of the US dollar’s post NFP data slump. However, compared to the losses it saw against most of the rest of the G10 currencies, USD’s losses on the day versus the JPY was comparatively modest.

One immediate observation is that US bond yields saw a substantial rally, further widening the US/Japanese rate differential in favour of the US dollar, thus offering some support to USD/JPY; the US 10-year yield gained 3bps to move to just shy of 1.17%. The Japanese 10-year was unchanged at around 0.05%, meaning the US 10-year/Japan 10-year differential widened to about 112bps from previously under 110bps.

Another factor capping the yen’s potential upside on Friday was the fact that it just really wasn’t a good day for safe havens; stocks continued to rally, crude oil was higher and, with the US dollar on the back foot, industrial metals came roaring back. In FX, it was largely the more risk-sensitive currencies that performer the best. The same themes that have been driving risk on all week were again in play; stimulus, economic recovery, vaccine and pandemic hopes. This was not a good recipe for the yen.