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Solid yield differential keeps the greenback buoyed

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Solid yield differential keeps the greenback buoyed

The theme in the currency markets continues to point to stronger European currencies, as the EU and the UK produce better than expected economic data, while the dollar is gaining strength against the yen on an increasing yield differential.  In fact the 10-year differential has moved to its highest level since January of 2011, and continues to enjoy a triple digit advantage.

As investors continue to expect the Federal Reserve to taper their bond purchases after their FOMC meeting in September, the 10-year yield has move higher testing resistance at the 3% level.  Yield currently standing near 2.85% as the bond market has priced in a reduction in bond purchases by the Federal Reserve after the open market committee meeting in September.  The increasing yield has pushed the 10-year yield differential to 220 basis points the highest seen during the past 3-years.

A stronger yield differential means that investors enjoy receiving yield with long dollar positions agaisnst short yen positions. The breakout in the 10-year differential will likely drive the USDJPY currency pair higher as the correlation between the two is generally strong.  This week dollar investors will need to absorb US Durable goods orders along with jobless claims, the S&P Case Shiller Index, and Jobless claims.

The technical picture for the USDJPY is strong after the currency pair moved above trend line resistance toward the end of last week.  The next level of target resistance for the USDJPY currency pair is 100.  Support is seen near the 10-day moving average at 97.94.

Momentum on the currency pair is strong with the MACD (moving average convergence divergence index) generating a buy signal toward the end of last week.  This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread.  The MACD moved from negative to positive territory confirming the buy signal on the USD/JPY.

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