BoJ Hike Odds Send Yen Funding Risks Skyrocketing

The Japanese Yen has been experiencing sharp movements in its money markets, but it's failing to find lasting support. According to ING's Chris Turner, this is due to a high probability of a Bank of Japan (BoJ) hike in September, which has seen the two-year US:Japan swap differentials narrow nearly 40bp since mid-July.

This should theoretically weigh on USD/JPY, but it's not happening. The benign conditions that favor the yen-funded carry trade are keeping the currency afloat. However, Turner sees rising risks for Yen funding and expects USD/JPY could fall below 158 if Fed rates stay unchanged.