The first two trading days of 2011 has been very kind to USD/JPY. After falling for 2 weeks straight, USD/JPY has finally found a bottom. According to my 2011 Dollar outlook, improvements in U.S. data should help the dollar recover in the beginning of the year. So far, we have seen some nice upside surprises and Friday’s non-farm payrolls report is expected to be very strong. I do not believe that the dollar will be in a long term uptrend this year, but I do believe that the first few months will be kind to the beleaguered currency.

I can’t take credit for this chart - my buddy at Nomura sent over this chart of USD/JPY in relation to US yields. The white line is the USD/JPY spot rate, the yellow line is the 5 year US-JPN yield spread and the orange line is the 2 year US-JPN yield spread. As you can see, there is a strong relationship between these instruments and the lines do not usually diverge significantly. However that changed in December, when USD/JPY fell steeply DESPITE a rise in the yield spread. What this chart suggests that USD/JPY ought to be trading at 86 and not 82.

 

Kathy Lien is Director of Currency Research at GFT, and runs KathyLien.com.