Renewed JPY strength remains a risk despite sharp USD/JPY rebound
Aug 7 (Reuters) -USD/JPY has rallied sharply off Monday’s lows (141.68) to trade closer to 147. While the majority of the move has been led by the recovery in U.S. yields and equities, dovish remarks overnight by Bank of Japan’s Deputy Governor, Shinichi Uchida prompted an acceleration of this reversal higher. However, it's not clear that markets are out of woods yet, and thus there remains a risk for renewed yen strength. This is also evidenced by the rebound in yen crosses stalling at key impediments.
BoJ’s Uchida opined that the central bank will not raise rates when markets are unstable, emphasising that the current degree of easing must be maintained for the time being. Now while this has helped stabilise Japanese markets, the BoJ was not the sole contributor to the purge in popular positions. Concerns over U.S. activity slowing had also been a factor, therefore, with volatility remaining elevated, downside risks are likely to persist.
The U.S. 10-year yield US10YT=RR has been capped at 3.94%, which marks the pre-NFP level. Meanwhile, the S&P 500 .SPX has failed to close the weekend gap at 5,347. In turn, renewed yen upside remains a risk.
Among yen crosses, most have faltered at the 200-hour MAs, which in large part have defined the trend lower since mid-July. Therefore, these will be key areas to assess whether the reversal in yen strength can be sustained.
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(Justin McQueen is a Reuters market analyst. The views expressed are his own.)
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