USD/JPY Tension Reaches Boiling Point as US Data Fails to Ease Pressure

The pressure on USD/JPY is building as markets test its limits. This comes at a time when US data has been contained, reducing some of the upward pressure on Treasuries and short-term rates.

However, real yields remain high, fiscal numbers are slipping, and the latest Treasury auction was not reassuring. The Bank of Japan remains cautious, with policy still too loose relative to the currency's current value. Long-dated JGB yields are elevated, with the 30-year around 4%.

A test of USD/JPY at 160 is crucial, as it will determine whether officials step back in and how they choose to do it. The previous intervention saw the US and Japan acting together, but the US Treasury chose to sell euros rather than dollars, avoiding a negative impulse into the Treasury market.

This has implications for Treasuries, particularly if another intervention is required. A potential feedback loop could impact the long end of the market, which is already sensitive to supply, fiscal deterioration, and elevated real yields.