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USD/JPY Weakness Accelerates, With Yields in Focus

JPY
  • The weaker USD backdrop persists after payrolls on Friday, with the USD Index plumbing new pullback lows this morning and the lowest levels since mid-May (101.676 today's low, 101.027 first support).
  • USD/JPY typifies the soft USD theme, with the pair lower for a fourth consecutive session and narrowing in on 50-dma support of 139.92 - last crossed in early May. The level could come in particular focus tomorrow if the US CPI report misses forecast and prompts a broader pullback in Fed pricing.
  • Yield differentials clearly the primary driver here, as the 2yr US-Japan spread has begun to partially reverse the sharp widening posted over the past three months. Yesterday's Manheim used car index update accelerated the move, pointing to a notable pullback in the price component for June.
  • Much attention has been paid to the particularly strong 5y JGB auction overnight (highest demand at auction in close to three years) and possible implications for YCC - there are broadening expectations for a tweak in yield policy as soon as the July 28th BoJ decision.
  • Options interest picks up later in the week and is biased higher (possibly indicating the pullback in spot has run further than expected), with notable strikes layered between Y141-142 on Thursday-Friday. Risk reversals are endorsing the current weakness in spot: 1m RR has faded to -1.7 points, the lowest since mid-May.
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