BUZZ-COMMENT-USD/JPY's sharp slide entices dip buyers

USD/JPY was on pace for its worst day since November on Wednesday as Treasury yields slid following the U.S. CPI report and expectations rose for a Bank of Japan rate hike in January, highlighting the risks of further yen strength.

The 2-year U.S. Treasury yield, at 4.27%, had wiped out gains made after the U.S. payrolls report and further declines will bring it closer to levels seen just before the Fed’s December rate cut.

USD/JPY stabilized after hitting a year-to-date low just beneath the post-Fed pullback level of 155.97 on Dec. 20. There is a prevailing view that significant losses in USD/JPY should be bought into, as strong U.S. fundamentals, investment inflows, and potential tariff measures support the dollar.

However, two lingering risks may support the yen. First, Japanese government bond yields are rising as market consensus shifts towards a January BOJ rate hike. This week, BOJ Governor Kazuo Ueda and Deputy Governor Ryozo Himino highlighted an improved outlook for wages and high import costs, the latter exacerbated by a weaker yen. Japan’s Finance Minister Katsunobu Kato said the government was “alarmed” over yen moves and will monitor central bank discussions closely.

Second, the incoming Trump administration has yet to outline its official stance on the dollar and tariffs. One-week option skews are the most USD/JPY bearish since the December Fed meeting ahead of Monday’s inauguration, though rising U.S. stock prices are dampening volatility.

Until these become clear, a narrow 21-day Bollinger Band for USD/JPY serves as a reference point. A move outside its 155.81–158.80 range would signal a new trend is developing. Until then, selling European currencies against the yen remains favored as rate differentials narrow.

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(Robert Fullem is a Reuters market analyst. The views expressed are his own.)

((robert.fullem@thomsonreuters.com;))