Currently more USD story – Commerzbank

There is one thing you can count on right now. If you wake up in the morning and USD/JPY is trading lower than the day before, you will have at least three articles in your inbox trying to explain to you that the Japanese Yen (JPY) carry trade is still going on. Rising interest rates, you will read, make it unattractive to continue borrowing in JPY, notes Commerzbank FX strategist Volkmar Baur.

JPY is sensitive to USD weakness

“Presumably in support of this, you will hear about the comments of BoJ Board members, who are currently stressing relentlessly that the BoJ will continue to raise interest rates (if the data comes in as the bank expects). The problem with this is that the market doesn’t seem to be very interested in the comments made by members of the BoJ in recent weeks.”

“The market is still not pricing in a likely BoJ rate hike in September – and the odds of a rate hike by the end of the year are less than 20%. USD/JPY moves are therefore more likely to be explained by renewed growth in Fed rate cut expectations. Indeed, the exchange rate continues to move in line with the spread between expected year-end Fed funds rates.”

“And since expectations for the BoJ have not changed significantly, the move follows logically from expectations for the Fed. So this is less of a JPY story and more of a USD weakness story. Even if more than other currencies”.