Where we are: USD/JPY currently trades at 159.22, down 0.35 from Friday’s close, after a volatile overnight session that saw a range of 159.10 to 159.60. The pair initially spiked higher following the BOJ decision before retracing to current levels. Despite the mild dip, we are still holding above the psychologically important 159.00 handle, indicating underlying buying pressure remains intact.
What’s driving it: The BOJ’s decision to hold rates steady, coupled with a lack of any hawkish forward guidance in the Monetary Policy Statement and Outlook Report, is the primary driver behind the recent Yen weakness. While the FT previewed a potentially hawkish tone from the BOJ, the reality was far more dovish, perpetuating the carry trade dynamic. Rising US 10Y yields, now at 4.323%, widening the US-JP 10Y yield spread to +185bp, is further fueling the upside in USD/JPY.
- Bloomberg wire headline “BOJ Seen Holding Rates in Messaging Risk for Ueda as Yen Teeters” underscores the market’s skepticism regarding the BOJ’s commitment to policy normalization.
- US 10Y yield pushing to 4.323%, providing a constant bid for USD/JPY.
- CFTC data reveals a heavily crowded short Yen position, with net non-commercial contracts at -94,460, sitting at the 0th percentile. This extreme positioning increases the risk of a sharp short squeeze on any positive Yen catalyst.
NY session focus: With no major US data releases scheduled, the focus will remain on risk sentiment and any further comments from BOJ officials. Watch for potential intervention cues from Japanese authorities; Finance Minister Katayama has already stressed a readiness to take “decisive” action. A break above 159.60 would open the door to a test of 160.00. On the downside, initial support sits at 159.10, followed by 158.50. The current trade is long USD/JPY given the carry advantage and BOJ inaction. The risk trade is short JPY. The pain trade remains a significant BOJ policy shift that forces a massive short covering rally.