The Japanese yen took a dive yesterday as USD/JPY climbed to 110.45, the highest level since February 2nd. Most of the move could be explained by a renewed sell-off in US Treasury, which sent the 10-year yield to 3.09% yesterday that fuelled another dollar rally. Indeed, it seems that market participants are completely ignoring local development in Japan and focus exclusively on USD related developments. Indeed, despite a contraction of the Japanese economy in the first quarter (-0.2%q/q versus 0.0% median forecast and +0.1% in Q3), the yen reversed losses partially as USD/JPY eased to 110.08, down 0.15% on the day. Meanwhile, the US 10-year yield slid to 3.06%, down 3.7bps from yesterday’s high.
In addition, the mounting geopolitical tensions stemming from trade war initiated by Donald Trump, the US unilateral withdrawal from the Iran nuclear deal, which create tensions with the European Union and especially France as well as the recent opening of the US embassy in Jerusalem, are not enough to depreciate the risk sentiment and trigger a yen recovery.
The widening monetary policy divergence between the Federal Reserve and the Bank of Japan is all that matter right now. Even though it cannot be ruled out that the Fed could slow down its pace of tightening, the BoJ is miles away from tightening its monetary conditions against the backdrop of stalling inflation pressures and anaemic growth. We remain fundamentally long USD/JPY with the 114 level as medium-term target.
By Arnaud Masset