USD/JPY, Gold: Yen, precious metals sink as US bond yields surpass election peak

• US Treasury yields spike, driving USD/JPY higher and precious metals lower
• Bond market volatility intensifies as traders demand more compensation
• Long-dated yields surge while short-dated yields ease after inflation data
• Powell's speech and inflation figures pose major risks for bond markets

Overview

US Treasury bonds are getting hammered again in Asia, pushing 10- and 30-year yields above the US election day highs. For rate-sensitive assets like the Japanese yen and gold, this is bad news.

US long bond yields surpass election highs

The chart below shows US 2-, 10-, and 30-year Treasury yields from left to right, with the rolling change over the past 24 hours beneath each.

Source: TradingView

The bond selloff started overnight after the US October inflation report reignited hopes for another Fed rate cut in December. While this sent shorter-dated yields lower, long-dated yields surged with corporate debt issuance contributing to the move.

Looser monetary policy may boost future economic growth and inflation is one angle, so too the prospect of highly expansionary fiscal policy under Trump administration. Bond traders are therefore understandably demanding more compensation to fund the US government.

Higher US yields crush JPY

The rise in US long bond yields is key for USD/JPY moves, as highlighted by the analysis below.

Source: TradingView

Over the past fortnight, the correlation between USD/JPY and US 5- and 10-year Treasury yields has been 0.96 and 0.95, respectively. That means USD/JPY almost always moves in line with yields. As they have risen, USD/JPY has marched towards the multi-decade highs struck earlier this year. The latest push broke 155.36, a level that acted as support and resistance in July. Momentum indicators like RSI (14) and MACD have also flashed fresh bullish signals.

Given the price action and momentum, a bullish bias is favoured. One trade setup would be to buy now or towards 155.36 with a tight stop beneath for protection. Targets include 160.23 and 161.95, the latter the YTD peak.

Source: TradingView

Gold wilts after breaking uptrend support

Gold isn't enjoying higher yields or stronger US dollar, sinking to fresh lows in Asia. Its moves are closely tied to US Treasury yields, especially the short end of the curve. Over the past fortnight, its correlation with 2-year yields has been -0.91. That means it's usually moved in the opposite direction to yields. 

Source: TradingView

Gold's latest lurch lower may also be explained by technical factors after slicing through uptrend support established in June. With RSI (14) in a downtrend and MACD confirming the bearish signal, it remains a sell-on-rallies play.

Unless you’re an intraday scalper or long-term investor, no trade stands out from a risk-reward perspective right now. However, if we were to see the price push back towards the June uptrend, it would provide a decent setup, allowing for shorts to be established with a stop above for protection. $2531.81 would be the initial trade target, a resistance level that capped the price for several weeks earlier in the year

Source: TradingView

Managing event risk

As for upcoming risks, Federal Reserve chair Jerome Powell is set to speak later in the session. Known for his dovish stance, traders may position for such an outcome ahead of his appearance at 3pm ET. Beforehand, US producer price inflation data will be released, offering another risk event of note for traders. Combined with Wednesday's CPI, the report will give insight into likely trends for the Fed's preferred inflation measure – the core PCE deflator due later this month.

-- Written by David Scutt

Follow David on Twitter @scutty