After a brief drop below the 158.00 level earlier in Asia trading, USD/JPY is finding itself pushing back to near three-week highs now at 158.30 levels.
The overnight high sits at 158.40, with the currency pair falling short of breaking a couple of key technical levels on the charts. The main catalyst for the drive to the upside is one that broader markets are also feeling, that being a break higher in Treasury yields.
The selloff in the bond market saw 10-year yields push beyond 5%, after having flirted with the question of a break all week. But yesterday, the bond vigilantes finally got a couple of catalysts to work with and ran with that.
The US flash PMI report for September came in much hotter than expected, with the composite reading jumping from 56.0 to 58.4 – the strongest reading since July 2021. Adding to that, input costs also accelerated to almost a four-year high.
Then, there was also a poor $70 billion five-year Treasury auction, which cleared at 5.033% with a 3.1 bps tail and a softer 2.21 bid-to-cover ratio.
Putting together stronger growth, sticky inflation, higher oil prices and shaky bond demand, you have a fairly uncomfortable combination for Treasuries.
And that in turn is leading the dollar higher across the board, with USD/JPY being one of the more notable movers in the major currencies space.
With the latest drive higher, USD/JPY is now contesting the same key resistance levels from overnight trading.
The first and arguably the most important threshold on the chart at the moment is the 200-day moving average (blue line). That sits at 158.43 and is helping to keep the upside price action more limited for the time being.
Adding another technical layer to that is the trendline resistance from the July and early September highs at around 158.22 on the chart.
If price is able to keep a firm break above the region around 158.22-43, it will quickly open up the path towards the 159.00 level and above. The 100-day moving average (red line) at 159.54 will be the next key technical line in the sand to watch out for next on such a move.
That being said, just be wary that as price continues to move higher, it does increase the appetite for Tokyo officials to intervene in the market again. After falling by 700 pips at the start of the month, USD/JPY has now recovered more than 500 pips of the drop.
And the closer the currency pair continues to move towards the key psychological level around 160, the stronger the likelihood we will see Tokyo officials push back before considering another round of intervention to curb further speculative appetite in markets.
This article was written by Justin Low at investinglive.com.