Yen Rally May Be Short-Lived Amid USD Weakness

The yen's recent rally has been driven by optimistic bets on tightening and changes to the GPIF, but this surge may not be sustainable beyond the near term. Thin liquidity due to the US holiday likely amplified yesterday's USD/JPY sell-off, pushing the pair through the key 155.0 level before extending to 153.0 overnight. The move still appears primarily driven by JPY-related factors rather than a broader shift in sentiment towards the dollar.

Despite short-term fundamentals suggesting the move is overdone, it remains risky to stand in its way, particularly given the scope for further carry trade unwinding. The next meaningful support only comes in at 152.0, where the yen rally stalled in January and February. A break below that could quickly open the way towards 150.0.

The yen rally continues to spill over into broader dollar weakness, even as the wider USD narrative remains unresolved. Strong energy prices (close to $100/bl) remain supportive, yet markets are still only pricing around 15bp of tightening for September and risk sentiment has held up well.