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Last Dove Standing Gets Spotlight


The yen turned bid on Thursday as the market continued to question the BoJ's ability to maintain its ultra-loose policy settings, with today's monetary policy decision drawing near (see our preview here). Spot USD/JPY repeated a 163-pip decline from the prior day. The previous time it fell by that much was on May 12.

  • 10-Year JGB yield keeps testing the upper end of its permitted trading band defined under the BoJ's YCC framework, even as the Bank has been stepping up its bond purchases to enforce the yield target.
  • Participants have been calling the sustainability of the BoJ's ultra-loose policy into question, with the OIS strip now pricing a ~65% chance of 10bp worth of tightening come the end of today's meeting (vs. ~30% on Thursday).
  • Sell-side analysts overwhelmingly expect the BoJ to stand pat today, with some suggesting that if the Bank was to introduce any tweaks today, they would likely come in the way of altered messaging setting the scene for policy action further down the road.
  • Hawkish BoJ bets may have been boosted by a surprise rate hike delivered by the SNB, another major central bank that has long refrained from tightening policy, pushing back against CHF appreciation.
  • Worth noting that BBG circulated a piece suggesting that the BoJ could face a loss of $200bn on its JGB holdings if it buckles under market pressure to abandon the YCC, should the curve shift upward by 100bp as a result.
  • Setting BoJ considerations aside, poor performance from U.S. and European equity markets and an upswing in the VIX index may have provided some further support to the yen.
  • Options traders have added bullish JPY bets, with USD/JPY 1-month risk reversal tanking to its lowest point since Mar 2020 on Thursday. Meanwhile, implied volatilities keep soaring across the curve, with most closely watched tenors hitting best levels since March 2020.
  • Spot USD/JPY has recovered from yesterday's lows and last deals +46 pips at Y132.67, with Jun 15 high of Y135.59 providing the next layer of resistance. Bears keep an eye on the 50-DMA, which intersects at Y129.48.

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