USD/JPY may be on cusp of a significant decline
June 19 (Reuters) -There is a growing risk of a substantial USD/JPY decline resulting from changing interest rates that may encourage speculators to pare huge yen short positions, and investors to unwind carry trades they have funded with yen.
Although USD/JPY continues to trade close to the peak of this year's uptrend, there have been changes in bond yields warranting a drop, and there may soon be bigger changes that put greater downside pressure on USD/JPY.
The spread between 10-year U.S. and Japanese bonds has narrowed sharply since April toward this year's low, hit in February when USD/JPY traded a 145.90-150.88 range.
Should the Bank of Japan hike in July and begin to trim its bond purchases, then headwinds for the USD/JPY rally will increase significantly. The first expected move in the U.S. easing cycle has been pulled closer to September and the amount of expected easing has almost doubled.
The net yen short position is still more than $11 billion and is likely much smaller than yen shorts used to fund interest rate plays that will be greatly affected by recent changes in yields, as well as coming policy changes.
An adjustment in USD/JPY resulting from the extreme divergence in U.S. and Japanese monetary policy may see the entire rise from 140.27 reversed.
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(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)
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