Deep Diving

BoJ chief had no mercy for the embattled yen on Wednesday as his latest comments showed unwavering commitment to the Bank's ultra-loose policy stance. Mr Kuroda told lawmakers that current cost-push inflation won't last long and the BoJ will continue with its powerful monetary easing to ensure that price growth accelerates towards the 2% target. Both Kuroda and FinMin Suzuki stuck to their usual talking points on the yen, stressing the importance of stability in FX markets, although BoJ Gov suggested that a stable weaker yen would be positive for Japan's economy.

• The uninterrupted flow of dovish BoJ speak helped drive USD/JPY to another two-decade high on Wednesday. The spot rate rallied as high as to Y134.47, extending its winning streak to four consecutive days.
• The VIX index hovered near recent lows but stock markets in the U.S. and Europe turned red. The yen failed to draw any strength from weakness in the equity space, as the BoJ's dovish resolve outweighed its safe haven appeal.
• U.S. Tsys faltered on Wednesday, widening the interest-rate spread with Japan, as the BoJ keeps the 10-Year JGB yield anchored within a -/+0.25% corridor.
• Bullish sentiment is building quickly among options traders, as USD/JPY 1-month risk reversal surged to a new one-month high on Wednesday. Implied volatilities soared across the curve, with main tenors (ex-overnight) hitting best levels since early/mid-May.
• The latest upleg in USD/JPY pushed its RSI into overbought territory. On top of that, the rate breached the upper Bollinger band yesterday, lending credence to the view that technical conditions are now overbought.
• USD/JPY has added 10 pips this morning and last deals at Y134.35, the yen underperforms at the margin. Bulls set their sights on the psychologically significant Y135.00 figure and a break here would expose Jan 31, 2002 high of Y135.15 and a key congestion area around there. Bears look for a pullback towards the 50-DMA, which intersects at Y128.24.
• There is little of note left on the local data docket this week, although previous releases had a limited impact anyway. The main focus remains on official rhetoric surrounding monetary & currency policy matters.