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  • USD/JPY has dropped back below the 108.50 mark in wake of a soft US CPI report and falling US yields.
  • Headlines regarding the next US stimulus bill did not move FX markets on Wednesday but are a theme to watch.

USD/JPY has continued its negative trading bias into a second day and after spending most of the session above the 108.50 mark, looks likely to close out Wednesday FX trade around the 108.40 mark, just above this week’s lows at close to 108.30. That translates into an only very modest decline on the day of under 0.1% or about 10 pips.

Driving the day

US bond yields have seen a decent drop on Wednesday, with the 10-year yield down about 2.5bps at the time of writing. Given that higher yields have been one of the key drivers of USD/JPY’s recent rally, it is perhaps somewhat surprising that USD/JPY did not fall a little more on Wednesday. Even more surprising is the fact that a softer than expected US Consumer Price Inflation report did not deal a greater blow to the buck – some analysts might argue that this is because most market participants still expect a substantial pick up in inflation over the coming months, so a slight miss in February hardly matters.

Alternatively, perhaps the market’s relatively upbeat mood has weighed demand for the safe-haven yen. Indeed, US stocks are (mostly) doing well, with the S&P 500 up about 0.7% and other risk assets like crude oil, AUD and NZD all pressing higher. Risk appetite received a boost from the soft US CPI report, which helped dampen US bond yields given that it pushed back against fears that the US economy is going to “overheat”. Meanwhile, it looks as though the US House has enough votes to pass US President Joe Biden’s $1.9T stimulus package into law in time for the expiry of enhanced unemployment benefits on 14 March.

There have also been a bunch of headlines regarding the next US fiscal stimulus bill. According to the Washington Post, Biden’s next bill (the “recovery package”) may be a package of “China” related measures (i.e. to address competitiveness with China) and could include action on semiconductors, supply chains, US manufacturing and 5G. According to the report, the timing of such a bill remains unclear. Separately, Fox Business News reporter Charlie Gasparino tweeted out that Biden’s “recovery package” could be worth as much as $2.5T over the next 4 years and could include some public-private partnerships that would aim to leverage government spending. Gasparino suggested that further details could start to leak in the coming days.

These headlines have not seemed to have impacted risk appetite much, but if this second Biden stimulus package starts to garner some traction in the coming weeks/months, this could be another reason for risk assets to rally, or panic about overheating, depending on the mood of the market and Fed messaging. In either case, this is unlikely to bode well for JPY.