USD/JPY steadies above 109.00, risk reversals rise
The Dollar-Yen pair is mildly bid in Asia near 109.39 [61.8% Fib retracement of 110.67-107.32] levels as Asian desks digest the overnight rally in the US stocks and the UN's decision to fresh sanction on North Korea.
North Korea inaction over the weekend and the uptick in Chinese PPI lifted the Dow Jones by 260 points. Thus, the Japanese Yen was offered across the board on Monday.
The curve or the spread between the US 10-year Treasury yield and the 2-year Treasury yield only improved slightly to 80 basis points from Friday's print of 79 bps. Meanwhile, the US-Japan 10-year bond yield differential widened to 212 bps from 206 bps.
The slight steepening of the Treasury yield curve and the widening of the US-Japan 10-year yield spread is USD positive.
25-delta risk reversals
The sentiment in the options market improved as well. The one-month 25-delta risk reversals rose to -1.4 from Friday's print of -1.825. The negative number does indicate that Puts are more in demand than Calls, nevertheless the improvement from -1.825 to -1.4 is slightly encouraging.
Looking ahead, the focus remains on the broader market sentiment, given the light data calendar in the US. The dollar bulls need to be cautious as North Korea may respond to UN sanction with another misadventure.
USD/JPY Technical Outlook
Kathy Lien from BK Asset Management writes-
"Having fallen from 114.50 to 107.30 in 3 months, USD/JPY is due for a short squeeze and a significant reversal is expected given the aggressiveness of the recent decline. There are no major U.S. economic reports scheduled for release until Wednesday so unless the U.N. imposes new sanctions on North Korea and they retaliate either verbally or physically this evening, we would not be surprised if USD/JPY hit 110. Eventually sellers will sweep in as the fundamentals weighing on the dollar have not changed. Technically, 110 is the next major resistance level for USD/JPY but the pair could extend as high as the 50-day SMA near 110.70."