Where we are: USD/JPY is currently trading around 159.05, edging lower after hitting intraday highs overnight in Asia. The pair remains elevated, threatening the prior intervention zone around 160.00. We’re well above the prior NY close as the market tests the BoJ’s resolve.
What’s driving it: The prospect of further BoJ tightening is diminishing after softer core inflation data, which printed at 1.4% in April, well below the BoJ’s 2% target. Board Member Koeda’s speech yesterday offered little new guidance, reiterating a data-dependent approach. The yen’s weakness is compounded by a slightly bid USD, as the broad index holds around 119.28, and a continued risk-off vibe in rates markets, with the US 2-year yield down 9bp to 4.04% and the 10-year yield down 10bp to 4.57%.
- Japanese core inflation softened to a four-year low of 1.4% in April, weakening the case for near-term BoJ rate hikes.
- Net non-commercial JPY positioning remains heavily short at -75,102 contracts, sitting in the 8th percentile, suggesting a potential for a sharp squeeze on any hawkish BoJ surprise or intervention.
- Wage data from the spring shunto consolidates the case for one more hike this year, but the BoJ has been slow to act.
NY session focus: Watch for any intervention signals as USD/JPY lingers around 159.00-160.00. The UoM Consumer Sentiment data at 10:00 ET will be closely watched, as a surprisingly weak print could weigh on the USD and provide some relief to the yen. Key levels to watch are 158.50 on the downside (intra-day support) and 160.00 as the immediate upside resistance. The current trade is to fade USD/JPY strength tactically, but the risk is clearly for a break higher if the BoJ remains passive. The pain trade is a coordinated intervention by the MoF and BoJ that finally breaks the back of the yen shorts.