Explainer: What moves USD/JPY and what is next after hitting five-year highs

• USD/JPY moves almost entirely to the tune of American developments. 
• The currency pair provides the best reactions to yields and US data.
• After the rapid run, a short-term correction is on the cards.

Time to stop overlooking USD/JPY – the currency pair is moving fast and has hit the highest in five years. What is moving the currency pair and where next? Here are some answers. 

Dollar/yen has hit 115.88, the highest since 2017 and it owes its strength to US yields. Returns on 10-year Treasuries shot up from 1.50% to around 1.63% on Monday, as investors priced in a rate hike from the Federal Reserve as coming sooner than later. The sell-off in bonds and the consequent increase in yields drove the pair higher – there is a strong correlation between USD/JPY and yields.

In general, the currency pair tends to have the best reaction to yields and also to economic releases in the US. While other currencies often move to the tune of risk-on/risk-off moves, the yen is a safe-haven currency like the dollar, and therefore, does not fall when US data is weak – risk-off – or rise in response to good figures from America, risk-on. 

As a safe-haven currency, the yen best reacts to geopolitical tensions. It can outperform the dollar when tensions rise around North Korea, and also between Russia and Ukraine. In such cases, it tends to decouple from yields. 

However, in the current environment, USD/JPY is trading in tandem with yields. 

What about events in Japan? The Bank of Japan needs to effect a substantial change to monetary policy – something that hasn't happened in years – to move the yen. Economic indicators such as GDP, inflation, and unemployment that Tokyo releases hardly move the needle.

With the current low level of inflation, the BOJ is set to stay put. This contrasts with the Federal Reserve, which is on course to raise rates in 2022, and the timing remains unknown. This uncertainty – raising rates in March or May, how many times the Fed will raise rates, etc. – is what stirs the dollar. The yen is only a bystander. 

USD/JPY short-term moves

In the shorter term, USD/JPY is trading in overbought territory according to the four-hour chart, as the RSI is well above the 70 level. That implies a correction. However, the trend remains to the upside and the pair could tackle 116 in short order. Further above, 116.50 is eyed. 

Support awaits at 115.55, a resistance line from November turned support, and then 115.20 and 114.90.