Investors sense that the sands beneath their feet are shifting. Rising US yields and equities have traditionally been yen negative. With the recent gains that carried the yen to its best level against the dollar since late 2016 and up 6% to lead the major currencies this year, the old relationships appear to have broken down.

The 60-day rolling correlation between the level of the dollar-yen exchange rate and the yield on the US 10-year Treasury yield has become inverted since mid-January, and now at -0.87 is the most inverted since 2001. Rising yields also were linked to the recent dramatic slide in equities, but in recent days, the US yield edged higher while the stocks rallied. The S&P 500 turned in its best weekly performance since 2011. The US 10-year yield rose nine basis points at the most and finished the week two basis points higher. The two-year yield rose nearly a dozen. The rise in the short-end appears to be a function of shifting views on Fed policy. The implied yield of the December 2018 Fed funds futures rose 8.5 bp over the past week.  

Rising US interest rates, the anticipation of more aggressive Federal Reserve, and a supportive policy mix has done little for the greenback, which fell to new multi-year lows against the euro, Swiss franc, and yen before the weekend. The greenback staged a dramatic recovery against most of the major currencies in North America ahead of the weekend. The negativity of sentiment toward the dollar discourages putting too much emphasis on a few hours of trading in NY before a long holiday weekend. Still, the price action before the weekend suggests another window of opportunity for a correction to the over-extended positioning and sentiment toward the dollar in the days ahead. 

The Dollar Index frayed important chart support in the 88.30-88.50 area but recovered smartly. It closed above the previous day’s high. The technical strength of such a pattern is enhanced by the fact that a new low for the move was recorded before the reversal; hence the nomenclature of a “key reversal”. The technical indicators did not confirm the short-lived new lows. A move above the 89.30-89.50 area would improve the tone.