USD/JPY eases back from multi-year peaks above 121.00 as global yield rally batters yen

• Higher international yields (versus Japan) and more dovish BoJ commentary are hitting the yen hard on Tuesday.
• USD/JPY hit multi-year peaks above 121.00 before backing off somewhat, with on the month gains near 5.0%.

The yen continues to suffer at the hands of a bearish combination of dovish BoJ rhetoric and higher/rising yields elsewhere and is the worst-performing G10 currency on Tuesday by a substantial margin. After BoJ Governor Haruhiko Kuroda reiterated on Tuesday that it remains premature to exit from its ultra-accommodative monetary stance and US 10-year yields surged to fresh multi-year highs above 2.35% (now up nearly 20bps on the week and 50bps on the month), USD/JPY was propelled to its highest level since February 2016 above 121.00.

The pair has since eased back to just above the 120.50 mark, but continues to trade with on-the-day gains of about 0.9%, taking its on-the-month gains to nearly 5.0%. The main driver of the move higher in yields that has propelled USD/JPY to multi-year peaks has been the Fed’s hawkish shift in its policy guidance. In wake of the central bank’s policy announcement last Wednesday and Fed Chair Jerome Powell’s speech on Monday, markets are upping their bets that 1) the Fed moves more quickly to lift rates (i.e. in larger intervals than 25bps per meeting) and 2) that the Fed takes interest rates higher than so-called “neutral” (the 2.0-2.5% area).

The extent of the move higher in USD/JPY has some traders worried that conditions might be becoming overbought – indeed, the pair’s 14-session Relative Strength Index (RIS) has reached 82.5 as of Tuesday, well above the 70 level that denotes overbought. That’s its highest since 2016. Whilst some consolidation/a technical correction might certainly be in order if US yields continue recent upside momentum, dips will remain very attractive. In the immediate future, traders should keep an eye out for a couple of Fed speakers orating later this session ahead of another speech from Powell on Wednesday.