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Yen Underperforms USD Weakness, USD/JPY Wedge With Yield Spreads Widens

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Yen finished down slightly against the USD for Wednesday's session, comfortably the worst performer in the G10 space. The USD suffered broad losses elsewhere, as the BBDXY fell 0.25%, the DXY off 0.36%, following a series of poor US data prints. USD/JPY tracks near 161.60 in early Thursday dealing.

  • Initially, USD/JPY rose to a fresh cycle high at 161.95 ahead of the US data prints, before pulling back a touch. With longer-dated US yields extending as much as 8-9bps lower, post the US data prints (the ISM Services was notably weak), USDJPY had a sharp move to the downside, briefly reaching 160.78.
  • However, in contrast to other G10 pairs, the greenback bounced back strongly, with USD/JPY eventually rebounding nearly 100pips.
  • For USD/JPY the technical backdrop remains unchanged, with Fibonacci projections at 162.21 the upside target, while the 20-day EMA is back near 159.07.
  • We continue to see divergence between USD/JPY and US-JP yield differentials, see the chart below. This may bring intervention risks into fresh focus, although language used by officials in the past week hasn't appeared to represent a step up in rhetoric around FX.
  • Key crosses like EUR/JPY and AUD/JPY are in overbought territory re RSIs (14), along with USD/JPY itself, although for USD/JPY the overbought signal was stronger in late April.
  • On the data front today we have weekly investment flows.
  • The 2024 pay deal concluded, with a 5.1% wage gain, the strongest in 33 years, see this BBG link. There was still a disparity between outcomes for large and small firms.

Fig 1: USD/JPY Verus US-JP Yield Differentials

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Yen finished down slightly against the USD for Wednesday's session, comfortably the worst performer in the G10 space. The USD suffered broad losses elsewhere, as the BBDXY fell 0.25%, the DXY off 0.36%, following a series of poor US data prints. USD/JPY tracks near 161.60 in early Thursday dealing.

  • Initially, USD/JPY rose to a fresh cycle high at 161.95 ahead of the US data prints, before pulling back a touch. With longer-dated US yields extending as much as 8-9bps lower, post the US data prints (the ISM Services was notably weak), USDJPY had a sharp move to the downside, briefly reaching 160.78.
  • However, in contrast to other G10 pairs, the greenback bounced back strongly, with USD/JPY eventually rebounding nearly 100pips.
  • For USD/JPY the technical backdrop remains unchanged, with Fibonacci projections at 162.21 the upside target, while the 20-day EMA is back near 159.07.
  • We continue to see divergence between USD/JPY and US-JP yield differentials, see the chart below. This may bring intervention risks into fresh focus, although language used by officials in the past week hasn't appeared to represent a step up in rhetoric around FX.
  • Key crosses like EUR/JPY and AUD/JPY are in overbought territory re RSIs (14), along with USD/JPY itself, although for USD/JPY the overbought signal was stronger in late April.
  • On the data front today we have weekly investment flows.
  • The 2024 pay deal concluded, with a 5.1% wage gain, the strongest in 33 years, see this BBG link. There was still a disparity between outcomes for large and small firms.

Fig 1: USD/JPY Verus US-JP Yield Differentials

Keep reading...Show less