USD/JPY Bulls Get Lifeline From Bond Bloodbath Despite Record Yen Strength
A rare surge in US-Japan yield spreads has failed to lift USD/JPY, but bond yields are still rising and the pair printed a bullish engulfing candle, indicating reversal risk is rising.
The recent widening of US-Japan yield spreads at a historically rare pace would normally support gains for USD/JPY. However, despite a strongly supportive rates backdrop, the pair has fallen sharply over the past couple of weeks.
The factors behind the lift in yields include surging crude oil prices and downstream distillates, which have only helped fan inflationary concerns, especially with some evidence in the US August producer price inflation report suggesting there may already be some pass-through into consumer-facing categories. This has seen expectations for a Fed rate increase in September lift to around 70%, with more than 40bp of hikes now priced by the end of this year, adding further pressure across the curve.
The question now is whether those factors that led to the unwind in USD/JPY will continue to overpower historical macro drivers that point to a growing risk of a reversal ahead of key data and central bank meetings next week. The bullish engulfing candle on Thursday raises serious doubts, with USD/JPY staging a significant reversal.