Where we are: USD/JPY is trading at 158.15, grinding higher after a brief dip overnight. The pair is trading near the upper end of its recent range, a whisker away from testing prior intervention levels, and above yesterday’s NY close of 157.80. The path of least resistance remains higher, fuelled by a potent combination of BoJ caution and resilient dollar strength.
What’s driving it: Despite Ueda’s recent comments flagging a willingness to hike further if the outlook tracks projections, the market remains unconvinced of aggressive BoJ tightening. The slow normalisation bias is firmly entrenched, and traders are hesitant to price in significant rate hikes until concrete evidence of sustained inflation emerges. This dovish perception continues to weigh on the Yen, particularly as US yields remain elevated. Dollar strength, reflected in the USD Broad Index at 118.0392, is further compounding the pressure on USD/JPY, with 2Y US yields at 3.95% offering a compelling carry advantage against the Yen.
- The Summary of Opinions from the Bank of Japan’s April meeting indicated policymakers discussed the possibility of additional rate hikes, but these signals haven’t translated into sustained Yen strength.
- Speculative positioning remains heavily short Yen, with net non-commercial positions at -61,738 contracts. This equates to the 13th percentile over the last 52 weeks, creating a notable squeeze risk if the BoJ surprises hawkishly.
- Rising US 10Y real yields, currently at 1.95%, continue to support the dollar and weigh on risk assets, including the Yen.
NY session focus: All eyes are on the 08:30 ET US PPI print. A hotter-than-expected reading will reinforce expectations for tighter Fed policy and likely drive USD/JPY towards prior intervention levels north of 158.50. Conversely, a significant downside surprise could trigger a short squeeze, potentially pushing the pair back towards 157.00. Keep an eye on the 14:30 ET Fed Chair Nomination Vote; a surprise outcome here is highly unlikely but could spark some volatility. The trade that’s working is fading Yen strength, but the risk is a surprise intervention or a hawkish shift from the BoJ. The pain trade for USD/JPY remains a sustained period of risk aversion coupled with a hawkish BoJ pivot.