USD/JPY peeps above 109.00, focus on rising yields and stocks

• USD/JPY has retraced 50 percent of the Q1 sell-off. 
• Rising yields and the widening yield differential is dollar positive. 
• Rising yield-led risk aversion could cap the upside. 

The USD/JPY  hit a session high of 109.06 a few minutes ago and was last seen trading at 108.95. 

As of writing, the 10-year yield is trading at 3 percent and the spread between the 10-year US treasury yield and 10-year Japanese government bond yield stands at 294 basis points - the widest since 2007. 

Hence, it is no surprise the currency pair has retraced 50 percent of the drop from 113.39 (Jan. 8 high) to 104.63 (March 26 low) and could target 110.04 (61.8 percent Fibonacci retracement of 1139.39-104.63) if the 10-year treasury yield continues to rise as suggested by bullish technical set up.

That said, the USD/JPY pair may run out of steam if the equities report big losses in response to rising yields. As of now, the S&P 500 futures are trading in a sideways manner, while the MSCI Asia Pacific index is down 0.4 percent. 

USD/JPY Technical Levels

A daily close above 109.01 (50 percent Fibonacci retracement) would open doors for a sustained rally to 110.04 (61.8 percent Fibonacci retracement) and 110.26 (200-day moving average). On the downside, breach of support at 108.78 (session low) could yield a pullback to 108.28 (5-day moving average) and 108.00 (psychological level).