USD/JPY inter-market: At fresh monthly highs, yield spread underpins

The USD/JPY pair set-off this week on a positive note, and staged a solid rally this Wednesday after a flattish close seen a day before.

The major reached fresh monthly highs at 106.53 on Tuesday after the greenback rebound sharply across the board, following the release of better–than expected US home buildings report. The auspicious housing data added to the signs of strengthening US economy and lifted the bids for the US dollar.

However, the bulls failed to sustain the upside and fell as low as 105.83 in the Asian trades this Wednesday, before finding fresh bids and bouncing back almost 100-pips towards 106.75, new monthly tops.

The latest leg higher in the USD/JPY pair is justified by a couple of intrinsics, with the primary driver being the yield spread between the US 10-year treasury yields and 10-year JGBs favoring the greenback. While persistent risk-on moods in the markets, as indicated by falling VIX (CBOE volatility index), weighed down on the safe-haven yen and therefore, boosted the rally in USD/JPY. The CBOE Volatility Index (VIX) drops almost 3% to trade at eleven-month lows of 11.59.

Looking ahead, markets await the US jobless claims and Philly Fed manufacturing index for further momentum on the major. However, the ECB decision due tomorrow may provide next direction on the US dollar ahead of BOJ policy review meeting held next week.