USD/JPY - US-Japan yield differential continues to rise, still Puts more expensive

US-Japan 10Y yield spread rises in the USD-positive manner.
Still, risk reversals indicate rising demand for USD/JPY puts (JPY calls).

Omkar Godbole FXStreet Contributor

The USD/JPY continues to ignore the rising US-Japan yield differential.

Having topped out at 114.74 in November, the currency pair dropped to a four-month low of 108.50 yesterday. The slide contradicts the rise in the 10-year US-Japan yield differential to the highest level since April 2010.

Yield spread

The spread currently stands at 254 basis points; down 4 basis points from the 8-year high of 258 basis points set on Jan, 22.

Meanwhile, the one-month 25 delta risk reversals fell to a fresh 3.5 month low of -1.35 yesterday, highlighting the USD/JPY put options are more expensive (more in demand).

Clearly, the correlation between the yield differential and the USD/JPY spot has broken down and the risk reversals show investors are prepared for further losses in the pair.

25 delta Risk reversals

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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