Japanese Yen: BoJ repricing supports gains against US Dollar – MUFG

MUFG’s Derek Halpenny highlights renewed Japanese Yen strength as markets price in more Bank of Japan hikes following recent comments from Takata and Ueda. He argues current BoJ pricing looks stretched, notes growing US influence via EUR/JPY intervention and political pressure, and stresses upcoming US data such as NFP and CPI as key for USD/JPY downside momentum and carry-trade unwinds.

Yen strength and stretched BoJ pricing

"The yen is the top performer again in G10 today with the pricing of BoJ rate hikes continuing to build in the aftermath of the speech by policy board member Hajime Takata when he hinted that the BoJ could decide to hike by a larger size than 25bps. The market has responded with 30bps of tightening now priced for the meeting this month. The year ahead pricing is now close to 100bps."

"While we see it as plausible that the BoJ could hike by that amount over 12mths we do not see it as likely at all that the BoJ will hike by a larger amount than 25bps. A hike this month will only just confirm a pick-up in the pace from every six months to every three months. There is still scope to pick-up the pace further if required before considering outsized moves."

"Momentum is certainly turning in USD/JPY as a result. The key change in our view is the more obvious US influence and the more hawkish BoJ. Weak US data this week (JOLTS & ADP) is helping and certainly a weak NFP and CPI data that reduces the prospect of a Fed hike this month would reinforce that downside momentum."

"Even though spreads have narrowed, volatility is incredibly low but 1mth implied vol has now jumped sharply and that change along with a further narrowing of the short-term spread could see a bigger positioning unwind. NFP is suddenly a much more [important] data point for near-term direction in USD/JPY."

"Katayama has previously publicly called for more domestic asset purchases by Japanese investors so we may well be heading for a sooner than expected formal increase in the composition for domestic bonds (25% currently)."