USDJPY has reversed fairly hard here, probably as US treasury yields were the chief driver of the original rally sprint to 111.50+ and the pair looked overextended as long US yields eased back and traded sideway, as the focus shifted to deleveraging in risky assets. A total reversal here is note the base case here and would take more downside falling back below 110.00 with a coincident erasure of the recent pop higher in US yields at the long end of the curve. Barring a very ugly volatility event which we by no means can do the sights are set higher in the medium term, assuming the Fed is set to continue its path towards policy normalization. Still, it is interesting to note that a number of JPY crosses are sucking wind and poking back toward major support levels after this equity market consolidation
equity markets have entered the danger zone in volatility terms in which only binary outcomes seem possible either a continued and possibly accelerating sell-off or a huge bounce of equal energy to the prior down move or first the former followed by the latter. In FX, we have seen an odd “tick-tock” in which first it was only the US dollar that was ascendant on the sharp rise in US yields in the wake of the FOMC meeting, followed by a now more vicious and steep rally in the Japanese yen after USDJPY spiked to new highs, as US yields then calmed as risk deleveraging continued. If the risky asset sell-off extends with treasuries sidelined and even rallying, the JPY may edge out the US dollar as a safe haven, but this would likely prove only a short-term development as long as yields are set to rise further down the line, as is our base case.
Need to see the climax of this risk-off event in the rear view mirror before judging market potential here outside of the general idea that anything can happen and FX volatility, as USDJPY implied volatility is still below 6.0%.