- USD/JPY rockets towards 138.00 on the strength of the US dollar.
- US CPI is feeding through into flows and supporting a firmer US dollar.
USD/JPY has run up towards 138.00 printing a high of 137.96 so far, trading 0.44% higher for the day following a move from 137.28 the low. Central bank divergence is in play and supporting the greenback.
The US dollar surged to a 20-year high against as per the DXY index which measures the greenback vs a basket of currencies. The euro also broke below parity after data on Wednesday showed US Consumer Price Inflation surged to a 40-1/2-year high in June. CPI reached 3% last month as gasoline and food costs remained elevated, more than the 1.1% expected by economists polled by Reuters.
Meanwhile, in other data, the Fed’s Beige Book of regional economic conditions reiterated that the economy expanded at a moderate pace, but “several Districts growing reported signs of a slowdown in demand, and contacts in five Districts noted concerns over an increased risk of a recession.” As for Federal Reserve speakers, the Atlanta Fed president Bostic said “everything is in play” at the July policy decision following the “concerning” CPI report, which could infer a 100bp hike.
In the bond market, the US yields were mixed following the stronger-than-expected inflation report. The short end sold off while long end rallied. The US 2-10yr curve is now 22bps inverse ”given the expectation of aggressive tightening to come from the Fed as well as the risks to long term growth outlook”, analysts at Westpac explained. ”2-year government bond yields rose from 3.05% to 3.21% before settling at 3.13%, and 10yr government bond yields fell from 2.95% to 2.90%.”
Meanwhile, JPY net short positions increased moderately last week. ”The hawkish positions of other central banks had underpinned speculation that the BoJ may have been pressured into adjusting its YCC policy as soon as last month’s meeting,” analysts at Rabobank explained. ”The BoJ held its dovish position, but speculation of a move is set to persist in the coming months and this, and some safe-haven flow, has lent some support to the JPY.”