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Fed Chair Powell failed to signal a sufficient level of concern on rising US treasury yields yesterday to soothe this market, which threw another tantrum, sending treasuries lower and yields soaring, and sending equities into a new tailspin while the US dollar went nearly straight up. The Fed will eventually act, but only once financial conditions are sufficiently dire to give him the cover to do so, as he can argue that sharply weaker financial conditions would feed through to Main Street USA and present disinflationary and labor market risks. The Fed may be happy for some measure of speculative froth to come out of this market rather than to be seen riding too quickly to the rescue. 

The Bank of Japan’s Kuroda made comments rejecting the notion in a parliamentary hearing that the BoJ is ready to expand the range of trading for Japanese government bonds. The 10-year yield was smashed back lower to around 0.07% after rising as high as 0.15% recently. 

USDJPY D1 03 08 2021 1928

USDJPY upside action accelerated again overnight as BoJ Governor Kuroda rejected the notion that the Japanese yield curve should be allowed to lift, which smashed long JGB yields back lower. To me, the pace of recent gains in USDJPY is getting to be too much too fast and will inevitably hit a brick wall at some point down the road – either once the Fed steps in with something to counteract the move in yields, or, perhaps more likely in the near term, when the move higher simply exhausts itself of its own accord. A reversal in all JPY crosses would prove most climactic if asset markets tank badly and finally trigger a bid into bonds. But for now, traders shouldn’t dare step in front of an onrushing train and should consider JPY call option strategies for any contrarian trading notions to the present trend  with a measure of patience and building a position over multiple sessions. Next big round level is 110 here.

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