The spread between the US 10-year bond and the Japanese 10-year bond continues to widen. This is the primary driver of the USDJPY currency pair. The correlation coefficient between the two is a remarkably robust 90%.
This means that despite the stronger than expected Q3 Tankan Manufacturing (9 vs. 6) and Non-Manufacturing (27 vs. 24) Indexes that were released this morning, monetary policy differentials continue to drive the USDJPY.
It is also worth noting that the strength in the USDJPY comes despite upwards movement in the Japanese 10-year to 0.776%. I.e., the BoJ's monetary policy is still regarded as loose in relative terms despite any concessions to the contrary.
The USDJPY is currently trading around 149.80, near the key 150.00 psychological level. This brings in the possibility of market intervention and, earlier today, Japanese authorities kept market participants weary of this. Finance Minister Suzuki told Reuters that "we are closely watching market moves with a strong sense of urgency." When questioned further about intervention, he refrained from commenting.
The USDJPY does seem to be in dangerous territory with regards to possible intervention. However, some market participants seem to think that it is not the level of the currency pair but rather the speed of depreciation that will cause the authorities to act.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.