Approaching Y140.00 With Relative MonPol Dynamics Still In Driving Seat

The dollar index (BBDXY) soared to its highest levels on record Thursday, pushing USD/JPY to Y139.39, its highest point since 1998. The yen was the worst G10 performer, owing to its vulnerability to rising U.S. Tsy yields.

• The jury is still out on the most likely magnitude of the next rate hike from the Fed. Comments from Waller (permanent voter) & Bullard ('22 voter) helped some of the Fed tightening premium to be unwound, as they flagged preference for a 75bp move at the next meeting.
• While those latest portions of Fedspeak allowed Tsys to find support, the lingering risk of more aggressive Fed tightening continued to sap strength from the yen, with the BoJ expected to keep interest rates rock bottom. A Bloomberg poll showed that the share of economists anticipating policy normalisation by the end of Governor Kuroda's term dropped to 14% from 22% in last month's survey.
• U.S./Japan 10-year yield spread moved off wides late doors, as participants parsed comments from Waller & Bullard. Still, the gap remained wider on the day.
• Negative risk backdrop failed to benefit the yen, with relative yield dynamics taking precedence. Most major European & U.S. stock indices finished in the red (albeit U.S. benchmarks trimmed losses and NASDAQ was virtually flat come the closing bell).
• There was a notable upswing in USD/JPY 1-month risk reversal, which printed its best levels in three weeks as the spot rate turned bid.
• When this is being typed, USD/JPY trades +12 pips at Y139.08. From a technical perspective, all eyes are on Y140.00, the next psychologically significant figure. Bears need a retreat under Jun 23 low of Y134.27 to get some reprieve.
• Looking ahead, the BoJ will announce its monetary policy decision next Thursday. USD/JPY 1-week implied volatility rallied to its highest point in nearly a month Thursday, although it is unlikely that the Bank will change its ultra-dovish course.