Yen carry trade back in vogue after BOJ
The yen carry trade is making a comeback.
The Japanese currency faced pressure on Thursday as yield spreads widened, driven by strong U.S. data and earlier dovish remarks from Bank of Japan Governor Kazuo Ueda.
The 10-year Treasury yield hit its highest levels since May following data showing a drop in weekly jobless claims and an upward revision of U.S. Q3 GDP, confirming that U.S. growth remains robust.
A hawkish shift from the Fed and dollar rally on Wednesday triggered USD/JPY’s latest upward move,which gained momentum after Ueda noted uncertainty regarding the strength of Japan's wage-inflation cycle and external factors, including the policies of the incoming U.S. administration.
He emphasized that moderate inflation allows the BOJ to be patient. Risk of falling "behind-the curve" will be in focus on Friday when Japan releases its November CPI, with the annual core rate expected to rise from 2.3% to 2.6%.
USD/JPY rose above the key 155 pivot level to a six-month high of 157.53. The pair’s 1.7% rise is the largest since the day after the U.S. presidential election and exceeds what was anticipated by options, a sign that policymakers caught the market by surprise.
As further gains push USD/JPY into overbought territory and back toward previous intervention levels, low levels of option convexity and limited futures positioning suggest intervention risks are low. This opens the door for a potential move towards 160 and a test of the 161.76 yearly high as upward momentum gathers, though market participants will watch for Ueda to push back on yen weakness when he speaks in front of the business lobby group Keidanren next week.
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(Robert Fullem is a Reuters market analyst. The views expressed are his own.)
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