Yen Propelled Higher

The week was supposed to be dominated by the UK election and the ECB meeting, but the yen is stealing the show in the first part of the week. The US dollar has been sold through JPY110 for the first time since late April. The euro has fallen from JPY125.30 before the weekend to JPY123.25 today. 

In our work, we tend to emphasize the yen’s sensitive to the interest rate differential with the US. The US 10-year yield cannot find traction. It is off three basis points to 2.15%. It is a single basis point above the low seen in response to the tepid US employment data at the end of last week.     

Old gaps are providing good mile markers, if not attractors. The US 10-year yield gapped higher last November 14, and that gap was a breakaway gap, and the yield did not look back. That gap is found between roughly 2.15% and 2.165%. It was closed following the jobs data. The 2.17% area corresponds with a 50% retracement of the rise in yields since the US election. The next retracement level is near 2.07%.  

In response to Macron’s victory in the first round of the French presidential contest, the dollar gapped higher on April 24. It briefly entered the gap the next day, but was not able to close it and the dollar rallied over the next several weeks. However, the recent dollar deterioration, and today’s drop, that gap is in play today. It extended to JPY109.40 and a break warns of a test on the year’s low set in mid-April near JPY108.  

Adding to the upward pressure on the yen, according to reports, was news that a stronger than expected increase in Japan’s cash wages. The 0.5% year-over-year increase in April. It is the highest of the year and matches the highs seen in Q4 16.|T|he erratic nature of the time series may be traced to bonus payments. They rose 5.6%. In Japan, the shift from part-time workers to full-time positions is being associated with upward pressure on cash wages, while in the US, that shift is thought to put downward pressure on average wages.