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Analysts at TD Securities explained that the latest gyrations in the equity and Treasury yield space have put the JPY back in focus.

Key Quotes:

“We are not convinced the melt-up in yields is durable without evidence of a clear macro catalyst.”

“Further, some of the peculiarities associated with the latest jump in yields suggests that the move may have been more technical in nature.”

“Given the relationship with UST yields, USD/JPY may become a key barometer for broader USD direction – just as it did in the early phase of its rally in March.”

“Market-implied long-term Fed fund expectations have already converged to the Fed’s terminal rate and may struggle to price more from here, suggesting USDJPY may have formed a top near 115.”

“We are also mindful of rinban operations, which have not stalled the move higher in 10yr JGB yields.”

“Our FV estimate suggests the pair should be trading closer to 111 (~2 stdev rich).”

“Unless macro conditions warrant otherwise, a back-up in yields may do more to upset the equity love affair than support another leg higher in USDJPY, leaving the pair more prone to a move lower given its increased beta to risk and Japanese investor appetite for equities.”

“On this basis, this could play out prominently in CAD/JPY.”