USD/JPY - US-Japan yield differential continues to rise, still Puts more expensive

• US-Japan 10Y yield spread rises in the USD-positive manner.
• Still, risk reversals indicate rising demand for USD/JPY puts (JPY calls).

The USD/JPY continues to ignore the rising US-Japan yield differential.

Having topped out at 114.74 in November, the currency pair dropped to a four-month low of 108.50 yesterday. The slide contradicts the rise in the 10-year US-Japan yield differential to the highest level since April 2010.

Yield spread

The spread currently stands at 254 basis points; down 4 basis points from the 8-year high of 258 basis points set on Jan, 22.

Meanwhile, the one-month 25 delta risk reversals fell to a fresh 3.5 month low of -1.35 yesterday, highlighting the USD/JPY put options are more expensive (more in demand).

Clearly, the correlation between the yield differential and the USD/JPY spot has broken down and the risk reversals show investors are prepared for further losses in the pair.

25 delta Risk reversals