USD/JPY rallies to mid-115.00s despite drop in US yields, bulls eye 116.30 resistance

• USD/JPY moved higher to near 115.50 on Thursday despite a drop in US yields, with bulls eyeing resistance around 116.30.
• Extreme volatility in global energy markets could have dampened the relative appeal of the energy import-dependent yen versus the buck.
• Fed members endorsing policy tightening despite geopolitical risks may also have helped the buck versus its safe-haven peer.

A sharp drop in US yields on Thursday as investors flocked to the safety of government bond markets and pared-back modestly on medium-term Fed tightening in wake of Russia’s invasion of Ukraine failed to dampen the dollar versus JPY. Both currencies performer well compared to the rest of their G10 counterparts given their safe-haven status, but a spike in erratic trade and a spike in global energy prices eventually saw the buck favoured. The pair closed Thursday trade in the 115.50 area, after rallying about 0.4% on the day and continues to trade subdued in this region as Asia pacific trade gets underway.

Risks to global energy prices are still very much tilted to the upside amid expectations for an intensification of the Russia/Ukraine war in the coming days, despite the US and EU for now avoiding sanctions on Russian energy exports. That suggests the yen (Japan a big net energy importer) may continue to underperform the US dollar (the US a net energy exporter) in the near future, regardless of what happens to yields and Fed tightening expectations.

Fed members were out in force on Thursday and the general consensus seemed to be that while war in Europe was a key risk to the outlook to monitor, it remains appropriate to press ahead with rate hikes next month. That has kept Fed tightening expectations for 2022 largely intact, even if calls for a 50bps hike in March have receded in recent days. The fact that holders of USD can bank on rising interest rates in the coming months is another reason to favour the buck over the yen in turbulent, risk-off market conditions.

If the recent surge in commodities keeps upwards pressure on yields, then it seems likely that USD/JPY might follow in the footsteps of the broader Dollar Index, which hit its highest since early 2020 in the mid-97.00s on Thursday. Bulls will be eyeing a test of the 2022 double top in the 116.30s. A break above could open the door to further progression towards late 2016/early 2017 highs above 118.00.