Spot USD/JPY ground higher Monday as U.S. Tsy yields rallied across the curve, with hawkish Fedspeak crossing the wires and all eyes on turbulence in UK financial markets.
- The rapid widening in U.S./Japan yield differentials continued as the latest signals reaffirmed expectations of further Fed/BoJ policy divergence. 2-Year spread grew 12.6bp to 11-year wides, while 10-Year gap rose 22.5bp to 10-year wides. Fed speakers kept beating the hawkish drum, while the BoJ boosted its regular bond purchases as its chief reiterated that powerful monetary easing is here to stay.
- BoJ Gov Kuroda also said the FX intervention last week was appropriate as a means to curb yen volatility and did not contradict the BoJ's policy stance. The Nikkei reported that Japan spent ~Y3tn on its intervention, citing estimates by market participants.
- USD/JPY risk reversals were heavy, moving out of sync with the spot rate. One-month option skews fell to its lowest point since early Jul, while one-year tenor printed worst levels in several weeks.
- Spot USD/JPY last trades at Y144.58, down 18 pips on the day. Bears would be pleased by a move through Sep 22 low of Y140.36, while bulls look for gains towards Sep 22 high/2.764 proj of the Aug 2 - 8 - 11 price swing at Y145.90/146.03.
- With Japan's final machine tool orders unlikely to cause much stir today, focus turns to Friday's data dump, which will include updates on unemployment, retail sales & flash industrial output.
Fig. 1: USD/JPY vs. U.S./Japan 2-Year Yield Spread
Source: MNI - Market News/Bloomberg