USD/JPY Rates Breakdown May Be Temporary
USD/JPY's long-standing relationship with front-end US Treasury yields and Japanese bond spreads suddenly broke down last week, but some market participants are suggesting this may be a temporary phenomenon.
The breakdown coincided with the calendar turn in Japan and the start of the second half of its fiscal year. However, the reaction to Friday's non-farm payrolls report suggests that the disconnection may prove only short-lived.
A strong rebound in US 2-year yields was mirrored by a similar move in USD/JPY, hinting that the rates regime could soon reassert itself.
Market positioning also played a role, with speculative yen longs more than halving since mid-September. Japanese portfolio outflows may have contributed to the disconnection, as hinted by seasonal patterns and NISA seasonality.