Our trade idea for USD/JPY at the start of the week was premised on a pullback in US treasury yields, lowering the USD’s appeal to traders.
At 03:00 tomorrow morning the US treasury will auction $21 billion of ten-year bonds. This will be key as demand at the previous auction was poor, with a bid to cover ratio at 2.53x. With yields around 40 basis points higher we could see investment managers increase their participation, which in theory could bring down yields, again lowering the appeal to the USD.
One thing we are concerned about is tomorrow’s BoJ meeting. Given the strong pick-up in recent Japanese economic data, we felt there was likely to be limited new information at tomorrow’s meeting. However, it has been announced today that the BoJ has called a special meeting with dealers and key market participants a couple of hours after the central bank meeting. This is not only a communication exercise, but likely as a result on new news which it needs to articulate to the market. Therefore, there are now risks that the BoJ announces certain changes to its different asset buying operations. This would be USD/JPY positive.
Ben Bernanke is also scheduled to speak in the early hours (06:10 AEST), and whilst the topics centre around 100 years of the Federal Reserve, there is a question and answer time afterwards, which the market will be keen to quickly move onto. Expect any rhetoric to be aimed at pushing back on the recent rise in yields, which could push down the USD.
So despite having real risks to a spike in USD/JPY, we feel comfortable with our view that USD/JPY could fall in the short term.