ING: USD/JPY - FJElite
Yen moves have continued to dominate the start of the week. Thin liquidity due to the US holiday likely amplified yesterday’s USD/JPY sell-off, pushing the pair through the key 155.0 level before extending to 153.0 overnight. This still looks primarily like a JPY story rather than evidence of a broader shift in sentiment towards the dollar. Fast money appears increasingly focused on a combination of a hawkish Bank of Japan and GPIF increasing domestic ownership.
Despite short-term fundamentals suggesting the move is overdone, it remains risky to stand in its way, particularly given the scope for further carry trade unwinding. The next meaningful support only comes in at 152.0, where the yen rally stalled in January and February. A break below that could quickly open the way towards 150.0. Whether such a move would prove sustainable if the Fed hikes next week remains an open question, but current volatility argues against trying to catch the falling knife.
The yen rally continues to spill over into broader dollar weakness, even as the wider USD narrative remains unresolved. Strong payrolls and elevated energy prices (Brent close to $100/bl) remain supportive, yet markets are still only pricing around 15bp of tightening for September and risk sentiment has held up well.
US equity futures point to a softer reopening today, which could lend the dollar some support against an otherwise empty calendar. We continue to think the bullish case for the dollar will prove stronger in the near term, although Friday’s US CPI release remains a clear risk event.