Where we are: USD/JPY is currently trading at 159.96, up 0.24% on the day and flirting once again with the psychologically significant 160 level. Overnight, the pair traded in a relatively tight range of 159.52-159.97. This level represents a continued test of intervention tolerance, holding above the previous NY close.
What’s driving it: The primary driver remains the widening yield differential between the US and Japan. With the BoJ holding rates steady at 0.50% at the last meeting on March 19, and only flagging a willingness to hike further if the outlook tracks projections, the market sees limited near-term upside for the Yen. This is amplified by the fact that three of the nine board members supported a hike, underscoring growing concern over inflationary pressures. US 10-year yields at 4.371% are providing strong upward pressure, with the US-JP 10-year spread now at a hefty +191bp.
- The BoJ’s slow normalisation bias continues to weigh on the Yen, especially given the lack of any imminent domestic catalyst.
- The CFTC data shows a crowded short positioning in JPY, with net non-commercial positions at -94,460 contracts, representing the 0th percentile over the past 52 weeks. This makes USD/JPY vulnerable to a significant squeeze on any positive Yen surprise.
- Despite repeated jawboning from the Finance Minister Katayama regarding readiness to intervene, the market appears to be testing their resolve.
NY session focus: Today’s key event is the FOMC meeting, with the Federal Funds Rate decision and statement at 14:00 ET, followed by the FOMC press conference at 14:30 ET. A hawkish tilt from the Fed will likely push USD/JPY through 160, testing intervention levels. Watch for any comments on quantitative tightening, which could steepen the curve and further pressure the Yen. The trade is clearly long USD/JPY, but the squeeze risk is building. The pain trade is a hawkish BoJ whisper that catalyses a large-scale short squeeze.