Date: 19 Feb 2018

De-risking ahead of Monday’s US Presidents’ Day holiday may have played some part in Friday’s price action in the currency and fixed income markets. If that was the case traders will have to decide whether or not those adjustments ahead of the US long weekend were telling or not. Dollar/yen is a case in point rebounding off the 105.54 low seen earlier in Friday’s session even as benchmark 10-year US yields edged lower to trade at 2.873 per cent into Friday’s New York close (in contrast to the 2.893 per cent level seen Thursday) and with the US yield curve flattening with the 2-10year spread falling to 65.9 basis points, the tightest level seen in 2 weeks. But that’s last week’s price action. Looking ahead it seems fairly clear that appointing a reflationist such as Masazumi Wakatabe as a Bank of Japan Deputy Governor was meant to send a clear message to markets that, whatever else any other central bank might be minded to do, the BOJ is resolutely committed to its current ultra-accommodative path.

On the face of it that might lead traders to wonder if USDJPY does have the potential to move a little higher but traders will also be mindful of the fact that Friday’s US Commodity Futures Trading Commission data for the week ending Feb 13 still shows a net short yen position, now of 115,509 contracts, equivalent to a long US dollar position of some USD13.4 billion. For USDJPY bulls there’s also the inconvenient fact that data from the US Treasury shows Japan has been a seller of US assets for five months in succession. To the extent that Japanese investors move out of US dollar-denominated asset and convert the greenback proceeds into yen for repatriation to Japan, that’s just another headwind for those who might see USDJPY bouncing.

Written by Neal Kimberley, External Currency Analyst.