Yen Tumbles Past Another Round Figure Despite Risk Aversion

The psychologically important Y135.00 gave way to rallying USD/JPY as (1) U.S. Tsy yields advanced after the release of firmer-than-expected U.S. CPI figures on Friday, (2) participants showed confidence in the dovish resolve of Mr Kuroda et al. ahead of this week's FOMC/BoJ monetary policy meetings, and (3) a senior lawmaker from Japan's ruling LDP helped reduce the credibility of verbal interventions by top financial officials.

• Spot USD/JPY struggled to break above Y135.00 for the better part of the Tokyo session, some suggested that topside was limited by the shrinking U.S. 2-/10-Year yield gap. The pair topped out at Y135.19, its highest level since 1998. Implied volatilities climbed across the curve, while 1-month 25 delta risk reversal snapped a two-day losing streak.
• Sales of U.S. Tsys resumed in cash Tokyo trade after CPI report published on Friday fanned hawkish FOMC bets. The greenback turned bid at the start to the new week, easily outperforming its major peers.
• The FOMC will deliver its monetary policy decision on Wednesday, just two days ahead of the BoJ's announcement. Japanese policymakers are increasingly isolated in their ultra-loose policy stance, which they are expected to reaffirm on Friday.
• Over the weekend, head of the LDP's Policy Research Council Sanae Takaichi said now was not the right time for an FX intervention, as yen weakness can help attract foreign tourists and increase export competitiveness. Her comments exposed cracks in the government's united front on yen weakness, cushioning the impact of official rhetoric signalling a sense of concern with rapid yen depreciation.
• AUD/JPY recouped initial losses amid fresh demand seen on the back of USD/JPY breaching Y135.00. The rate struggled for any further gains, with the Aussie dollar and its commodity-tied peers pressured by risk-off reaction to COVID-19 headlines out of China. Australian markets were shut for a holiday.
• Shanghai and Beijing reported upticks in COVID-19 case tallies and walked back on some of their recent re-opening measures. Offshore yuan went offered even as the PBOC set the mid-point of permitted USD/CNY trading band below the expected level for the third day in a row.
• UK economic activity indicators are about the only notable data release today. Comments are due from ECB's de Guindos, Holzmann & Simkus as well as Fed's Brainard.