US Dollar Heads to the High Ground but USD/JPY Slips. Where to for USD/JPY?

US Dollar, USD/JPY, DXY Index, Japanese Yen, Treasury Yields, JGB, BoJ, Kanda – Talking Points

• The US Dollar ascent continued overnight with the DXY making a new high
• Firm US data underpinned interest rate markets with firming Treasury yields
• JGB yields are static. Will that see intervention in USD/JPY at some stage?

The US Dollar popped to a new peak going into the end of the week with solid US data keeping the Federal Reserve in the spotlight and underpinning Treasury yields.

The DXY (USD) index nudged 105.16 in the US session, the highest level since the collapse of Silicon Valley Bank (SVB) in March this year.

Overnight saw jobless claims for the week ended September 2nd print at 216k, below estimates of 233k and 229k previously. It comes on the back of some solid economic data over the past week.

Despite this, the interest rate market is ascribing an almost zero probability of a hike by the Fed at its September 20th Federal Open Market Committee (FOMC) meeting.

The benchmark 10-year note had a look over 4.30% in the North American session but has settled back near 4.25% going into Friday’s trade. The 16-year high of 4.36% seen last month might be challenged at some stage.

At the same time, Japanese Government Bonds (JGB) yields remain steady near 0.65%.

As a result, the yield spread between Treasuries and Japanese Government Bonds (JGB) has been widening but not to the same extent that occurred when USD/JPY hit its peak in October last year.

USD/JPY AND YIELD SPREAD BETWEEN 10-YEAR TREASURIES AND JGBS

Chart created in TradingView

Earlier this week we saw some light jawboning from Masato Kanda, Japan’s Vice Minister of Finance for International Affairs.

On speculative moves in foreign exchange, he said, “if these moves continue, the government will deal with them appropriately.”

USD/JPY has been trying to make a run above 148 but has failed on three consecutive days in the aftermath and has slipped lower today.

Should there be another assault to higher ground, it might be reasonable to expect more commentary from Japanese officials.

The market generally does not think that there is likely to be physical intervention by the Bank of Japan (BoJ) until the October peak of 151.95 comes into view.

Of course, history has shown that central bank intervention is not always successful, especially at the onset and if the desired direction is inconsistent with underlying fundamentals.

With that in mind, a move above the prior peak near 152 cannot be ruled out.

BoJ board member Hajime Takata also made remarks this week and it might be the case that these two officials might be the people to focus on for signals that may drive USD/JPY price action.

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— Written by Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel via @DanMcCarthyFX on Twitter