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  • USD/JPY squeezed out fresh monthly highs at 104.462 in earlier trade.
  • US yields have risen, driving an increase in US/Japanese rate differential which has supported USD/JPY.

USD/JPY squeezed out fresh monthly highs at 104.462 in earlier trade, the pair having traded on the front foot for most of the session. A pick up in risk appetite is driving weakness in both USD and JPY versus most of their major G10 counterparts, on account of their status as safe-haven currencies. However, nominal US yields have seen a decent rise on Thursday (US 10-year yields are up more than 4bps to nearly 1.06%), driving an increase in US/Japanese rate differentials that tends to favour flows from JPY into USD, hence supporting the pair. That would explain why JPY has underperformed USD on Thursday, anyway. A slightly better than expected number for December Japanese Retail Sales in the early Asia Pacific session seemed not to have too much of an influence on the price action.

Driving the day

Risk appetite has taken a meaningful turn for the better on Thursday, with US equities having now, for the most part, erased losses incurred on Wednesday in the lead up to the FOMC monetary policy decision event. Not that Wednesday’s downside move was spurred by the Fed, whose ultra-dovish tone ought actually to be interpreted as a risk appetite positive. Rather, Wednesday’s risk-off was a result of a combination of overvaluation fears and short-selling hedge funds being forced to liquidate profitable large-cap stock long positions as speculative retail trader driven mania continued in the likes of GameStop.

The fact that retail brokers have taken action to restrict the ability of retail traders to continue pumping these stocks, thus easing the pressure on hedge funds (and the broader market), is likely helping sentiment take a turn for the better. As of right now, the S&P 500 trades with gains of north of 2.0% on the day and the improvement in risk appetite is being felt in other asset classes too; US bond yields are up (with the wider US/Japan rate differential likely a key factor supporting bond market-sensitive USD/JPY) and safe-haven currencies are generally underperforming.

Market analysts note that another factor driving equity upside on Thursday, and thus hurting demand for the likes of safe-haven JPY, is dip-buying. Looking past all of the retail trader driven speculative mania that has taken place (and dominated the headlines) over the past few days, the major fundamental factors that have supported the record-breaking rally in US stocks from March 2020 lows to current near all-time high levels remain largely unchanged; 1) real yields on US and international debt markets remain at historic lows as a result of ultra-accommodative monetary policy at most major global central banks, meaning TINA remains in place (an acronym meaning There Is No Alternative to investing in equities if you want to get a decent yield) and 2) though facing hiccups, mass vaccination programmes are underway in major developed economies, meaning an aggressive post-pandemic global economic recovery is still very much expected to begin within the next few months.

USD/JPY key levels