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Summary
- In July, USD/JPY had its worst month since November last year, falling almost 7%.
- Before the MoF intervened on 11 July, the pair topped out intraday just below 162. Now, post-Fed and BoJ, USD/JPY lingers near its lowest level since March.
- Although most of the event risk for this week has passed, the US non-farm payrolls (NFP) report later today could shift markets materially.
Market Implications
- The huge drop in USD/JPY leaves us sidelined in the pair, looking for new impetus post-NFP.
July Has Seen Whiplash Price Action in USD/JPY
In the first trading week of July, USD/JPY was comfortably above 160 and had been there for a week or two. The carry trade, popular throughout 2024, was the driver.
On 11 July, however, the MoF intervened, triggering dramatic price action. In our previous G10 FX Weekly on 25 July, we noted that the pair had free-fallen from a high just below 162 to ~152.50.
At the time, we advocated a tactical buy-on-dips view. And, from a low of ~152 on 25 July, the pair rallied to ~155.25 on 30 July.
Then came the BoJ rate hike on 31 July. And the Fed meeting was hours later, which triggered the US 10-year yield to fall 11bps on the day. In response, USD/JPY has taken another aggressive leg lower, now trading sub-150, lingering near its lowest level since March.
USD/JPY Bumping Up Against a Big Trendline Support
The move below 150 is psychologically important.
For better or worse, the market likes to talk in round numbers, so piercing 150 is noteworthy. This is especially so since, less than one month ago, USD/JPY was trading above 160.
Beyond the attention-grabbing allure of round numbers, though, the 150 level in USD/JPY is also technically important. USD/JPY is now testing a trend line that extends back to early 2022.
Should this trendline properly break, it could very easily trigger additional downside. The first target could be ~147, last seen in March.
A stretch target could be the YTD low, seen in January, near 140.
10-Year UST/JGB Rate Differential Has Narrowed Considerably
Carry has been perhaps the biggest driver of USD/JPY upside this year.
The spread of US 10-year yields over corresponding Japanese yields has made it very attractive to be long USD and short JPY.
Throughout 2024, this spread has traded above 300bps. The average level for the spread this year is ~340bps, with the spread only trading below 320bps in 2024 last month.
The spread is now just below 300bps, for the first time since this time last year.
Should this spread narrowing continue, we expect this will feed into more downside for USD/JPY.
Stand Aside (For Now) in USD/JPY, Reassess Post-NFP
With the US NFP report due later today, taken together with the volatility described above, we prefer standing aside and observing price action in USD/JPY. We will decide what to do next after the data.
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