Yen Gets Beating With Monetary Policy Divergence In Spotlight

The yen got battered Monday as participants digested Fed Chair Powell's hawkish Jackson Hole speech, which drew renewed attention to interest rate spread with Japan.

• Powell's assertion that the Fed would continue to hike interest rates included in his Jackson Hole speech last Friday stood in contrast with comments delivered by his Japanese peer during the symposium. Gov Kuroda reiterated that the BoJ "have no choice other than continued monetary easing until wages and prices rise in a stable and sustainable manner."
• Negative equity sentiment failed to accentuate the yen's safe haven allure, even as benchmarks retreated and the VIX index gained. The European safe haven CHF was also softer.
• U.S. Tsy yields were wobbly but gaps with JGBs widened. 10-year spread rose ~4bp, while 2-year differential rose ~2bp. The latter gap reached its widest levels since 2007.
• USD/JPY risk reversals advanced across the curve. One-month tenor had a look above par, moving through the zero level again this morning; one-year skews showed at their best levels since 2015.
• Latest data from the CFTC showed that leveraged funds trimmed net JPY short positions by 1,779 contracts to 9,863 in the week through Aug 23. By contrast, asset managers boosted their net short positions by 29,637 contracts, the most on record, to 66,172.
• Spot USD/JPY last deals at Y138.73, little changed on the day, with bulls looking for a rally towards Jul 14 multi-year high/round figure of Y139.39/140.00. Bears look for a dip through the 50-DMA, which kicks in at Y135.89.
• On the data front, focus turns to flash industrial output, unemployment, retail sales, housing starts and consumer confidence, all due tomorrow. Later this week, capex & company profits/sales data will cross the wires Thursday.

Fig. 1: USD/JPY vs. U.S./Japan 2-Year Yield Spread (rhs)

Source: MNI - Market News/Bloomberg