Could we be on the brink of another breakdown in USD/JPY?

Today’s JOLTS report put a 50 basis point Fed cut squarely back on the table, along with the idea that the US won’t be able to sustain high rates. That’s causing a rethink in the spread for US rates over Japan and has led to a second day of of heavy selling in USD/JPY.

A look at two-year US yields highlights the risks, with a 12 basis point drop today sending them to 3.77%, which is below the August low and at the lowest since the US regional bank mini-crisis in 2023.

US 2s correlate tightly with USD/JPY and right now that pair is barely holding the September low. If it cracks, we could get a further unwind in the carry trade, with a test of 140.00 possible.

There is also a correlation with the Nikkei and given today’s 4.2% fall, some red flags should be up.

This article was written by Adam Button at www.forexlive.com.