Real yields moving in favour of USDJPY downside

From the FXWW Chatroom: BNP: Japan’s core y/y CPI rate held steady at -0.5% in August, in line with our economists’ expectations, with the effects of JPY appreciation this year offsetting any support from the tight labour market. Our Japan economics team discuss the outlook for inflation in this week’s Macro Matters (pages 10-11) and note that inflation is unlikely to pick up in the near future. With Japan inflation expectations stubbornly low, while US real yields drift lower, real yield differentials are moving against USDJPY which we think leaves the pair vulnerable until markets begin to price for more significant Fed tightening prospects. The jump in crude prices Wednesday seemed to spur gains in USDJPY on Thursday, but our STEER™ framework suggests higher oil prices have coincided with a lower USDJPY of late, and our STEER™ target has now slipped below 100. We remain tactically short USDJPY, targeting a move down to 97.

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