TD: USD/JPY All About The Curve

TD Securities note that “the downside surprise in U.S. ISM services nearly pushed USD/JPY to challenge key technical support around Y130. But the dip was short-lived, suggesting that position squaring ahead of the NFP report into a liquidity challenged long weekend.”

• “Getting below Y130 in USD/JPY is a formidable but surmountable challenge given the technical formations there. Should U.S. NFP or CPI underwhelm, the level will face an onslaught of pressure. USD/JPY is one of the purest expressions of Fed policy risks in FX. Since SVB's collapse, the pair and the broad USD have displayed more persistence in trading in sympathy with the red/green SOFR strip (i.e. cut pricing) though yield variation in the U.S. Tsy curve is less impactful. Notably, USD/JPY and calendar spreads beyond M4 are highly inversely correlated, so any curve steepening in this area will push USD/JPY somewhat higher.”
• “The question is whether the market will remain fixated on cuts in this part of the curve. We still see the market approaching data and the curve asymmetrically (i.e. data downside more impactful) as further tightening in lending conditions is expected. That leads us to believe that this market may be less inclined to renege on the short USD theme in key reserve currencies anytime soon as easing in late reds/early greens is likely to be less acute than in the whites.”