USD/JPY Rates Disconnect May Prove Temporary Amid Key Events
The relationship between USD/JPY and front-end US rates broke down sharply last week, but seasonal flows and positioning suggest this disconnect may be temporary. The strong positive correlation between USD/JPY and front-end US Treasury yields, particularly the 2-year yield and the US-Japan 2-year spread, collapsed rapidly over a five-day window. However, the reaction to Friday’s September jobs report indicates that this disconnection could be short-lived, with both US yields and USD/JPY rebounding strongly.
One possible explanation for the temporary disconnect is the NISA seasonality. Japan’s Nippon Individual Savings Account scheme encourages households to invest in overseas assets, potentially causing yen weakness and USD/JPY strength during the quarter turn. Additionally, speculative yen longs have more than halved since mid-September, further contributing to the disconnection.
Looking ahead, key event risks include Fed speak, Monday’s ISM services PMI, and a speech from BOJ Governor Kazuo Ueda on Tuesday. These events could provide catalysts for volatility, particularly as markets await key September inflation data due midway through October. In Japan, Ueda’s remarks could offer clues about the pace of BOJ tightening ahead of the October policy decision.
Technically, USD/JPY has been range-bound, with key levels to watch including 158, the 50-day moving average, and support around 157. The immediate focus will be on how these levels interact with potential catalysts from Fed speak and economic data.