Japanese banks have been shrinking foreign exposure and reducing JPY loans, this is a push up factor for JPY and will help us navigate the JPY pathway comfortably. In my books getting strategically long JPY into year-end makes sense, markets are not prepared for a setback with trade negotiations and with Fed continuing to flood USD supply the USD looks set to march sharply lower.
Those following the macro flows since the beginning of the year will remember the infamous USDJPY chart:
For the technicals engaging in short exposure at key resistance here makes sense 108.6x with initial targets at 107.9x followed by the key level of interest at the bottom of the 107 handle 107.1x.
Jump into the comments with your charts and views on USDJPY and further conversation for all following other risk plays.
"In my Tradingview Portfolio, interestingly US 2s10s curve flattened further despite yields ticking higher, implying the risk asset rally is overcooked and makes me happy to remain short USDJPY. There is room to add on the 109 handle with only a break above 109.5 requiring reassessment."
Firstly, inflation rate differentials between the US and Rest of World. As inflation domestically in the US picks up pace it effectively causes a weakening of its competitive advantage as USD appreciates. To put simply, the USD needs to depreciate in order to offset the loss in competitive advantage and Powell has taken the driving seat here by adding USD liquidity to ease funding pressures.
Secondly, how the Fed are communicating with markets with respect to inflation targets in their mandate. The jawboning of late aims for a steeper yield curve and lower real yields for longer which will limit the Fed toolbox meaning any overshoots in inflation will not expedite Fed beginning the hiking cycle.
Lastly, Fed injecting USD supply to help with excess reserves to ease fears of money markets short-circuiting. This smells a lot like the environment before 2000 where banks hoarded USD. The scarcity in USD is starting to turn into flooding.
Hope it helps.