The US dollar continues to see selling against the Japanese yen at the moment, in what would be thin holiday trading.
USD/JPY
The US dollar is down sharply during trading on Monday in what would be somewhat thin trading, as Americans are away celebrating Labor Day.
The dominant driver is the aggressive repricing of Bank of Japan policy. Japanese front-end yields have pushed higher, and markets are increasingly positioned for a Bank of Japan rate hike.
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The yen has reached a 7-month high against the US dollar due to tightening expectations, repatriation flows, and yen carry trade unwinds that continue to accelerate.
The other side of the trade is a little less supportive
The other side of the trade is a little less supportive, as markets are still debating whether the Federal Reserve will hike this month, but uncertainty ahead of the CPI print is presenting a problem for the dollar to get a lot of traction.
The huge US-Japan yield advantage remains, but the direction is now moving in the yen's favor. That matters more than the absolute spread at the moment. Longer term, this will come back into play, more likely than not.
Technically speaking, it looks like the 154 yen level to roughly 155 yen is support. If we were to break down below there, then you could see an even deeper unwind.
A bounce from here makes some sense, but the question is whether or not the CPI and the PPI numbers this week suggest that the US will have to hike. If they come out hotter than anticipated, that could reverse this flow fairly quickly.
Right now, the bias is bearish. But again, it is a market that gets not only the CPI and PPI numbers coming out of America this week, but we get interest rate decisions coming out of both the United States and Japan next week.
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