Thursday was the sixth-consecutive day of Japanese yen selling and it ended with a flourish. It left the US dollar higher by 83 pips against the yen to 158.91.
That's only higher than a few hours on April 29 when the pair broke 160.00 in a rout before the Japanese Ministry of Finance intervened in a strong move that ultimately lowered the pair to 151.85.
Why the yen weakness?
1) The Swiss National Bank
The SNB and Bank of Japan have long been brothers in the FX market as low-yielding central banks that have been fighting low inflation. The Bank of Japan is trying to hike rates but the cut from the SNB, which was partly a surprise, highlights that the BOJ is swimming against the current.
2) Low inflation
Inflation is turning into yesterday's story. Treasury yields are falling and US 5-year breakevens are down to 2.2%. Equity markets have remained high but it's all AI-driven with cyclical stocks increasingly struggling. Lower demand will result in lower global inflation and that could keep yen-borrowing rates at rock-bottom levels.
3) Japanese banks
There are concerns about Japanese banks after Norinchukin Bank said it will sell $63 billion of sovereign bonds, mostly Treasuries and European sovereigns. The sales will take place by the end of March 2025 to shore up the balance sheet. Some say it's a one-off but there's a long history of trouble at banks spreading and that certainly isn't leading to a flood of money into Japan.
4) Strong equities
Breadth in equities has been narrow but the trend has been higher and that's led to improving risk appetite. That kind of sentiment is a classic boost for USD/JPY and it was aided by moderately higher yields on Thursday.
5) Capitulation
When you get a six-day move that led to a 34-year extreme, there is a good chance that someone is capitulating. The problem right now is that you can't find many reasons to sell USD/JPY. If I'm Japanese authorities, I would be hoping for a painful correction in equities or some soft US data. I think that's in the pipeline but we're not there just yet.
What's ahead? In just a few hours at 7:30 pm ET, Japan will release updated CPI numbers. A surprisingly high reading on core inflation (above the 2.6% y/y reading expected) could rekindle talk of rate hikes.
