Japanese Government Bonds
As the Asia session wore on, there was a greater focus on JGB moves. And while this is more about short-term noise, as I will elaborate below, it could have medium-term implications for USDJPY. With spot trading comfortably above 114, and the 10y JGB yield is around 0.15% – the highest since February 2017. Traders know that the BoJ can come in anytime but then again, the weaker JPY may provide them with the opportunity let the yield curve control mechanism to widen a touch keeping in mind the did say during summer it would allow the 10y yield to deviate by as much as 0.2pp around zero.
The Japanese Yen
My base case scenario on USDJPY is that over the next 3-6 months the BoJ will jiggle policy and it could happen as early as December in conjunction with a Fed hike. Kuroda and company have been floating trial balloons the past three months trying not only gauge market sentiment put prepare Japanese exporter for the inevitable and indeed with USDJPY in and around 115 + level it would give them some leeway to raise interest rates. But one of the pluses for the BoJ is that the Yen has lost its safe appeal so its more or less a differential trade. They want to change policy believing that JPY will not strengthen excessively but desperately want to help the banking sector and improve the monetary transmission mechanism channels to allow the banks to raise the cost of borrowing and make some money after a decade of struggling. I think this is the primary reason why USDJPY is not trading + 116 as traders sense that something is afoot.
The Rest of Asia: Oil and USDCNH driving the bus
As for the rest of the Asia space, markets took out some topside ranges as US yields were a significant focus with US 10-year yields driving bullish USD sentiment, while the weakest links in the chain IDR -INR were getting the double whammy for US rates and Oil. The rest of the basket was influenced by USDCNH breaking fundamental 6.90 level with follow through to 6.9160 level. Fearing state bank offer may to the market and not wanting to trigger a heavy-handed reaction from the Pboc after Golden Week, markets pulled back. But liquidity thin, and it didn’t take much volume to test +6.91 nor for the market to sell off to 6.89, so take everything today with a pinch of salt.
