The U.S. dollar is trading higher against all of the major currencies this morning except for the Japanese Yen. Import prices was the only piece of U.S. data released today and the 0.5% decline was right in line with expectations and therefore barely elicited a reaction in the dollar. After hitting a high of 102.15 on Monday, the rally in USD/JPY has stalled. Given that the break above 100 was caused by the combination of higher U.S. yields, rising Japanese and U.S. stocks and Japanese purchases of foreign bonds, negative developments on all 3 fronts has capped the rally in USD/JPY for the time being.

Overnight, 10-year JGB yields jumped 11bp, which is huge for Japan considering that their bonds yield only 0.85%. Last night’s move took yields to their highest level since August 2011. This increase is one reason why some domestic investors may choose to keep their funds in Japan. U.S. bond yields have also opened the day lower following a decline on Monday. Our readers should know that rising U.S. yields is a necessary criteria for a further rally in USD/JPY. Thankfully U.S. yields have not declined much and therefore the sell-off in USD/JPY is limited. Also, the pullback in the Nikkei overnight is nominal and U.S. stocks have opened slightly higher, which is helping to support USD/JPY.

We continue to believe that the consolidation in USD/JPY over the last 36 hours is simply a pause before further gains. However it is important for all USD/JPY traders to keep their eyes on U.S. and Japanese yields because how they move will help determine if and when USD/JPY extends higher.

The most interesting fluctuation in the FX market today is the continued sell-off in AUD/USD, which dropped below 99 cents intraday. The currency pair has taken a tremendous beating over the past month and has lost nearly 6% of its value since April 11th. With no major technical support until 98 cents, the currency pair is likely to extend lower.

As for the EUR/USD, its worth noting that even with a weaker than expected ZEW survey, the currency pair refuses to break 1.2950 in a sustainable manner. With economic data taking a turn for a worse, we believe it should only be matter of time before this level is given.

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