USD/JPY: Dollar jumped after Japan expressed “greater” sense of concern on Yen strength

• USD surged after light Japanese jawboning.
• USD was also helped by upbeat US economic data on Friday.

USD/JPY closed the European session on Monday around 106.57, up by almost 0.35% after making a daily high of 106.72 in a holiday-thinned market as the US is offline today. The short covering from Friday’s 15 month low of around 105.54 came after the Japanese government said that it is watching Yen´s move with “greater” sense of concern and is ready to act (intervene) when actually needed.

The USD also got some boost on the reappointment of Kuroda as BOJ chief as he may continue his “powerful” easing until the illusion of 2% sustainable Japanese core inflation target has been fulfilled. BOJ may refrain from raising 10Y JGB yield as a part of its YCC (yield curve control) policy change in the near term, considering the recent rapid appreciation of Yen. The market may be now assuming that the BOJ is still far away from its “stealth tapering”.

USD was also helped by positive US economic data on Friday coupled with US DOJ (Department of Justice) indictment report for the alleged Russian disinformation campaign. The 37-page indictment of a Russian internet agency filed by Special Counsel Mueller described a conspiracy with the aim of supporting Trump and showing distrust in the US political system.

The DOJ report was helpful for USD as it referred no specific American (Trump) collusion for the alleged Russian interference and disinformation campaign and indicted only 13 Russian nationals. Although Muller’s marathon investigation regarding the alleged Trump ans Russian collusion in the US election is not over yet, the USD got some boost from the DOJ conclusion as an element of US political risk may have been removed to some extent.

Moreover, the US import price index for Jan grew by 1% against an estimate of 0.6%; prior: 0.2%; this may be positive for imported inflation for the US economy, although it may be also a function of a weaker USD.

But, the USD also came under some pressure on trade protection/war concern after reports that the US may impose additional import duties or some quota system on steel and aluminum imports, although it may be positive for US manufacturers for steel and aluminum. Today South Korea and China called for retaliatory action including WTO against such ”harsh” US trade restrictions.

On Monday, Yen was also impacted by mixed Japanese economic data; Tankan manufacturing index came muted, while trade balance flashed above estimate with upbeat export figure despite a higher Yen, but import data was terrible, indicating a subdued economic activity in Q1.

The benchmark US 10Y bond yield is now hovering around 2.873%, dropped a little bit from the recent high of 2.944%; US bond market is closed today.

The market may be now confused about the trajectory of US bond yields. Some analysts think that it’s heading towards 2.70% as Fed might not go for its projected 3 rate hikes in 2018 as core inflation is still well below 2%. Some other analysts also think it's heading towards 3.25% by December’18 on increasing chorus of Fed and global QT (quantitative tightening).

There is some strong buzz on the street that apart from increasing pace of Fed balance sheet tapering, some other major holders of the US treasury (foreign central bank) like Japan are selling their FX assets in the form of US treasury at an increasing pace and that is primarily responsible for the recent bloodbath in US treasury notes and subsequent surge in US bond yields.

Technical View:

Technically, USDJPY now has to sustain above the 105.40 area; otherwise, 105.05-104.40 and 103.60-102.70 and even 101.45-99.90/99.05 zones may be on the card.

For any meaningful recovery, USDJPY must stay above 107.50 zone for 108.00-108.25/45 and 108.95-109.30/110.50 zones in the coming days. Any short covering till 107.00-107.30 area may be turned into a “dead cat bounce” unless backed by some solid fundamental news.