Yen's Discount Begins to Erode as Japan's Policy Shifts
The tide has turned for the yen, as Japan's largest FX intervention in fifteen years forced a cleanout of tactical yen shorts and reminded carry traders that even the easiest trades can develop teeth.
The Bank of Japan (BoJ) accelerated the pace of rate hikes, which reduced some of the inflationary sting from expansionary fiscal policy. This change in domestic policy is chipping away at the reasons the yen's discount existed in the first place.
The shift has changed the asymmetry in USD/JPY, making the upside no longer as clean due to intervention risk and the BoJ's actions. However, the downside now has several more doors through which it can enter, including a genuine portfolio reallocation, faster BoJ hikes, or a Fed that fails to deliver its current pricing.
The distribution of USD/JPY has changed, with a 158 area still making sense tactically but the longer horizon bending lower toward 155 and then 150 due to valuation finally having something behind it other than hope.