Where we are: USD/JPY is currently trading at 157.80, up 0.41% on the day, having traded in a range of 157.10-157.84. The pair has steadily climbed through the Asia and European sessions, breaking above yesterday’s highs and approaching the 158.00 level. This level will be key to watch as it flirts with previous intervention levels.
What’s driving it: The primary driver for USD/JPY remains the widening US-Japan yield differential. The Bank of Japan’s commitment to a slow normalization process, reinforced by Governor Ueda’s willingness to hike further if warranted, is not providing sufficient support for the Yen. The 2s10s JGB curve at +112bp reflects expectations that rate hikes are some way off. With US 10-year yields at 4.422%, the US-Japan 10-year spread stands at a wide +192bp, keeping upward pressure on USD/JPY. DXY strength is amplifying the move, currently up 0.27% at 98.26, as is a general risk-on mood, as evidenced by futures pointing to a higher open. Wage data from the spring shunto continues to support the case for one more hike this year but the market sees the BoJ’s actions as too little too late.
- USD/JPY broke key resistance at 157.50, opening the door for a test of intervention levels above 158.00.
- The US-Japan 10-year yield spread remains extremely wide, incentivizing carry trades that favor the USD.
- Net non-commercial JPY positioning remains heavily short at -102,059 contracts (0th %ile), increasing the risk of a short squeeze if the BoJ surprises the market.
NY session focus: All eyes on the 10:00 ET US data dump – ISM Services PMI, JOLTS Job Openings, and New Home Sales. Better-than-expected prints will likely propel USD/JPY higher, potentially testing 158.50 and triggering further intervention speculation. Watch US 10-year yields for direction; a move above 4.45% would likely exacerbate Yen weakness. The trade that’s working is selling JPY against USD and other crosses. The trade at risk is shorting USD/JPY if the BoJ unexpectedly intervenes or signals a more aggressive tightening path. The pain trade for USD/JPY is a coordinated global central bank effort to weaken the dollar.