Yen Outperforms Post Fed, 1 Week USD/JPY Risk Reversal Close To YTD Lows

USD/JPY was mostly on the back foot post the Asia close on Wednesday. We ended the session around the 140.20/25 region, a yen gain of nearly 0.50% and the best performer in the G10 space. There was some volatility in the pair over the FOMC decision and press conference - we got sub 140.00 (low 139.93) before finding some support.

• US yields were volatile through the NY session, as the market digested the Fed and Powell's comments, but finished lower, albeit more so in the 2-7yr segment (2yr at ~4.85%, with a rough range of 4.82/4.92%). The market read Powell's comments as slightly dovish in terms of progress on the labour market and tighter lending credit conditions, while further hikes are very much data dependent.
• USD/JPY is now back to levels that prevailed last Friday, prior to wire reports of no change in YCC at tomorrow's BoJ meeting. Support lies at the July 21 low of 139.75, while on the topside, sights are on 142.08, 61.8% of the early July downleg.
• Upward momentum in US-JP yield differentials has stalled somewhat, although more so at the front end. US-JP 10yr swap spreads are a touch below recent highs and tracking sub +300bps. Still yen gains look firmer than implied by these trends.
• 1 week USD/JPY vol is higher at +16%, but below Jan/Mar highs from earlier this year. The 1 week risk reversal sits around YTD lows at -4.11. This comes ahead of tomorrow's BoJ decision, with no major policy changes expected, but focus on inflation forecast changes. Today on the data front is weekly investment flow data.