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JPY: USD/JPY Extends Weakness as Vols Pinch Carry Trade Dynamics

JPY
  • Latest spell of USD weakness largely triggered by GBP/USD hitting the 1.30 bull trigger translates to further losses for USD/JPY, with JPY comfortably outperforming all others in G10. USD/JPY has edged through 157.19 support on a pick-up in volumes - after more muted trade overnight, cumulative activity now sits above average for this time of day. Y156.83 marks the next downside level, the 38.2% retracement of the Dec'23 - Jul'24 bull leg. 
  • JPY vols are bid, which may be containing carry trade-oriented flows, with the two-week contract now capturing the BoJ's July 31st rate decision - to be accompanied by fresh Q3 forecasts for inflation and growth. The contract has been marked up to just shy of 10 points, and has seen support following the likely intervention late last week. 
  • Notably, SocGen wrote overnight that the JPY carry trade strategy is losing its attractiveness - largely due to the narrowing policy differentials with overseas markets and increased volatility in the JPY. 

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