Japanese Yen: Faces risk of return to 160 against US Dollar – ING

ING’s Francesco Pesole highlights that softer United States (US) data and a more dovish Fed outlook should, in theory, benefit the Japanese Yen (JPY) given its high rate sensitivity. However, Pesole warns that post-intervention rebuilding of JPY shorts and limited impact from Bank of Japan (BoJ) expectations leave USD/JPY vulnerable to choppy trading and a possible retest of 160.0 this month.

Post-intervention JPY shorts rebuild

"The yen should, in theory, remain one of the main beneficiaries of dovish US surprises given its high sensitivity to rates. The problem is the seemingly inevitable bias to rebuild JPY shorts after an intervention episode."

"Neither intervention risk nor growing confidence in a September Bank of Japan hike – with this morning's minutes modestly more hawkish – appears sufficient to counter that trend. USD/JPY has already returned to the pre-payroll 158.30-158.50 area."

"The path ahead may remain choppy. A move back to 160.0 at some point this month remains a tangible risk, even if September ends up delivering both a BoJ hike and a Fed hold."

"Our dovish Fed call is strengthening, and so is our bearish bias on the dollar. Despite Friday’s repricing, 11bp are still priced in for September, 28bp for December and 40bp for April. There remains ample room for dovish repricing to harm the dollar if we are right about the Fed. Today, the US calendar is empty, but we’ll hear from Fed arch-hawk Beth Hammack."