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  • USD/JPY is at seven-month highs close to 107.00 and looks set for a fifth straight day of gains.
  • A risk-on market tone, central bank divergence and strong US data are being cited as bullish factors.

Another day, more upside for USD/JPY. The pair, which it currently trading at seven-month highs not too far from the 107.00 level and is up 0.3% or just over 30 pips on the day, is set for its fifth consecutive day of gains. After rising 1.4% in January and then 1.8% in February to rally from yearly lows below 103.00 to current levels not far from the 107.00 level, USD/JPY upside looks set to continue with no end in sight, technically speaking. August 2020 highs around the 107.00 level will offer some resistance, but a break beyond this area will open the door to further upside this month towards 108.00.

Driving the day

USD/JPY is getting tailwinds from a few separate factors on the first trading day of the month; though US bond yields are showing mixed price action (short end yields are down and long-end yields are up in an unusual steepening of the Treasury curve), calmer price action in bond markets has eased nerves in the broader market. With equity investors no longer fretting so much about rising yields, attention has returned to the positive macro backdrop and global equities have been surging on Monday with focus on; 1) Congress moving closer to passing US President Joe Biden’s $1.9T stimulus package (the House voted in favour of the bill on Friday and it now goes to the Senate), 2) Johnson & Johnson’s Covid-19 vaccine was just given EUA in the US, meaning the country’s vaccine rollout will now further accelerate and 3) falling global Covid-19 infection rates and a general trend towards lockdown easing (including in both the US and Japan). Commodity and commodity/risk-sensitive currencies are outperforming. Amid the risk on, safe-haven JPY is out of favour.

Meanwhile, central bank divergence also seems to be working in USD/JPY’s favour; Bank of Japan sources this morning told newswires that the bank is prepared to defend its 0.0% yield target for the 10-year Japanese government bond, with the bank said to be intent on not letting 10-year yields rise above 0.3% under any circumstances. The BoJ’s policy of actively intervening in bond markets to prevent any upside on bond yields sits in stark contrast with the message coming from the Fed; FOMC Member Thomas Barkin was on the wires on Monday speaking about how not only is he not concerned about rising yields, but that the Fed would actually be disappointed not to see yields rise when economic conditions improve (a kind of statement that would be unimaginable from the BoJ). Barkin’s lack of concern about the recent rise in US bond yields reflects similar sentiments expressed by other FOMC policymakers including Chairman Jerome Powell, Vice Chairman Richard Clarida and NY Fed President and influential FOMC member John Williams. Powell will be speaking again later in the week and is expected to reiterate his lack of concern.

Finally, a very strong/very inflationary US ISM Manufacturing PMI survey for February might also be adding further reason for market participants to get long USD/JPY; headline ISM Manufacturing PMI number came in above expectations at 60.8 (expected was 58.8), its highest since September 2018. The employment subindex rose to 54.4, boding well for this week’s official US labour market report. New Orders rose to 64.8 from 61.1, in a sign of strong demand ahead. But the Prices Paid subindex shot higher to 86.0, its highest level since 2008. According to Capital Economics, “higher oil prices and the depreciation of the dollar are putting some upward pressure on US prices this time around too, but the scale of the rise in the ISM prices paid index goes well beyond what can be explained by those factors alone”. The economic consultancy continues that “the comments in the report also make it crystal clear that these shortages go well beyond just semiconductors, with firms in every sector reporting shortages and problems with suppliers keeping up with demand”.

Amid further evidence of the build-up of inflationary pressures following this latest ISM report, ING comments that they now “expect inflation to rise above 3.5% in the second quarter”. Though the Fed has said that this expected increase in inflation will not be sustained and thus does not warrant a policy response, ING think “there is a growing risk inflation could end up being a little stickier around the 3% mark given the prospect of vibrant, stimulus fueled demand coming up against a supply-constrained economy and businesses taking advantage to rebuild margins.” Thus, concludes the bank, though “the Federal Reserve tells us that they don’t think they will raise interest rates before 2024… we feel that this will be increasingly difficult to reconcile with the data… (and) mid-2023 looks increasingly likely to be the starting point for higher US interest rates”.


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