The Japanese yen extended the upside last week with USD/JPY above the 111 threshold, the highest level since February 2nd.
Most of the move could be explained by a renewed sell-off in US Treasury, which sent the 10-year yield as high as 3.09%, while the Japanese 10-year was stuck around 0.06%.
Market participants are completely ignoring local development in Japan and focus exclusively on US related developments. Indeed, despite a contraction of the Japanese economy in the first quarter (-0.2%q/q versus 0.0% median forecast and a downward revision to +0.1% in Q3), the yen reversed losses partially following the release, with USD/JPY easing to 110.08, down 0.15%. Similarly, the worse than expected inflation figures, which were released on Friday, had little effect on the currency pair. Headline came in at 0.6%y/y versus 0.7% expected and 1.1% in the previous month, while the core gauge printed at 0.7%y/y versus 0.8% median forecast and 0.9% in March. These are way off the Bank of Japan’s 2% inflation target, so the bank will not soften its reflation stance anytime soon.
On the geopolitical stage, the mounting tensions stemming from trade war initiated by Donald Trump, the US unilateral withdrawal from the Iran nuclear deal, which creates tensions with the European Union and especially France, as well as the recent opening of the US embassy in Jerusalem, were not enough to depreciate the risk sentiment and trigger a yen recovery. Instead, the yen kept losing ground, as investors preferred to take shelter into the Swiss franc.
In the end, the widening monetary policy divergence between the Federal Reserve and the Bank of Japan is all that matter right now. Even though it cannot be ruled out that the Fed could slow down its pace of tightening, the BoJ is miles away from tightening its monetary conditions against the backdrop of stalling inflation pressures and anaemic growth. We remain fundamentally long USD/JPY with the 114 level as mediumterm target.
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