JPY flows: JPY weakness looks corrective and unsupported by news
JPY losses overnight look hard to justify based on news. Decline looks mainly technical and likely to meet JPY buying near current levels
USD/JPY corrected sharply higher overnight, with commentators suggesting that tariff uncertainties were behind the move, but this seems to be a typical case of trying to find news to fit the market move. While the Japan Industry Minister has requested the US exclude Japan from steel & aluminium tariffs, it is hard to see why this is JPY negative even if such a request is rejected. Japan is no more vulnerable than others to such tariffs. In any case, regardless of news (and there has been plenty of Trump and tariff related news in the last 6 months) USD/JPY has stuck very close to moves in yield spreads since last August. It is hard to see why this should change now, and on the basis of this yield spread correlation, USD/JPY looks to be at least 2 figures too high.
Perhaps a better explanation is that the JPY is moving due to cross flows. We saw some of this on Tuesday, with EUR/JPY managing a modest recovery, and the continued resilience of equity markets may be behind the JPY’s losses on the crosses. This year has seen a break away from the correlation with equity risk premia that has described the path of EUR/JPY in recent years, but with risk premia still hovering near their lows, and Asian equities performing well overnight, the JPY may have suffered from risk positive trading.
Even so, from here we find it hard to justify much further JPY weakness. A correction was no doubt overdue technically, but 154 in USD/JPY and 159.50 in EUR/JPY should be areas where JPY bulls are likely to want to re-establish or add to long JPY positions.
