BUZZ-COMMENT-Still waters obscure deeper fight for yen direction

USD/JPY will probably remain heavy due to worries over U.S. economic growth, though the downside trajectory may be frustratingly mild for yen bulls.

USD/JPY pulled back on Friday alongside Treasury yields after a soft U.S retail sales report, demonstrating that the link between U.S. 10-year yields and USD/JPY remains strong. Both have been wobbling in sync in the wake of recent U.S. growth and inflation data releases and they have each been in a similar downtrend since peaking in the middle of January.

USD/JPY's decline has been gradual, hindered by expectations that persistent inflation and U.S. tariff policies will keep the Fed from cutting rates. A recently-formed inverse relationship between USD/JPY and rising U.S. breakevens suggests inflation may become a broader issue for the dollar, especially if the Fed's reluctance to cut rates sparks more volatility in the equity markets.

However, it's not just U.S. yields affecting the yen. There remains a strong link between spot prices and USD/JPY forward points, indicating that expectations of Bank of Japan rate hikes is influencing the pair. The appointment of Junko Koeda to the BOJ policy-making panel signals that hawkish voices will likely dominate, although recent activity suggests some trimming of rate hike expectations as JGB 10-year yields reach a new 15-year high.

Options do not anticipate significant volatility for USD/JPY in the near term. Implied volatilities are lower, skews are unchanged, and pricing for extreme moves is subdued. The lack of clear directional bias in the options market suggests the pair will likely stay within a 150-155 range -- with a slight downward bias -- until a new catalyst emerges, be it the next inflation data, new U.S. tariff developments or updates on progress toward Ukraine peace talks.

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