After the trend of rising US bond yields reversed yesterday, the Japanese yen followed suit. While strong US economic data typically supports bond yields (as rate expectations typically rise following good growth figures), this was not the case yesterday. As such, the yen strengthened and continues to strengthen this morning. We have downgraded our short-term outlook on USD/JPY to neutral accordingly. Looking at news, Japanese insurers (such as Nippon Life) have publicly stated their intention to continue buying US bonds. As Japanese investors sell yen in exchange for USD investments, the yen is expected to weaken further.
USD/JPY is currently trading just below 113.60. The pair rose above 114 yesterday, but was unable to hold on to its gains. EUR/JPY is also up, and currently trading above 134.30. The currency pair is starting to look overbought in the short-term.
There is a fair amount on the calendar this week relating to Japanese data releases. On Monday, we saw the coincident index (117.7 vs. 115.7 previous) and the leading economic index (107.2 vs. 105.2 previous) rise above the previous print. Earlier today, cross-border stock and bond data showed that Japanese investors continued to sell foreign securities. Foreign investment in Japanese stocks came in at ¥686.0B while foreign bond investments came in ¥10.9B. Finally on Friday, we'll see consumer price index numbers. Given the weak outlook for inflation, CPI data is unlikely to have a significant impact on the yen.
Thanks to a sharp rise in US bond yields recently, the Japanese yen has weakened considerably. As such, we are downgrading the yen to bearish in the short-term. While the yen looked oversold in late September, today the currency has re-entered normal trading conditions.
After falling sharply on rising US bond yields and Abe's victory in the recent national elections, we are downgrading the yen to bearish. Looking at the yen on a weekly chart, the currency remains far from overbought or oversold levels looking at various technical indicators. Thus trading conditions remain normal.