When the bond market turns, USD/JPY gets crushed. 5 reasons behind the drop | Forexlive
USD/JPY is down a whopping 260 pips today following a 140-pip decline yesterday. The pair is trading at 150.46 fr om a high of 156.76 mid-month.
That’s a real turn and it’s particularly dramatic today as the US dollar is dogged by month-end flows.
USD/JPY daily
It’s a case of “up the escalator, down the elevator” that’s typical of bull markets.
The turn in this pair has come with a few drivers, listed in order of importance:
1) The top in Treasury yields
A series of strong auction this week have helped to knock 10s down to 4.25% from 4.50%, with the move accelerating today on a strong sale of 7s.
2) Scott Bessent in charge
The market took comfort in Trump putting a Wall St. FX and hedge fund guy in charge. That points to a guy who loves stock market gains more than tariffs and someone who will be tempered, at least somewhat.
3) Tariffs (or not)
The counter-point to that is that Trump announced tariff plans for Canada, Mexico and tariffs. But if you look below the surface, those don’t sound like real threats and instead are related to solvable problems around drugs and migrants (not the economy). That’s another sign he isn’t overly committed to tariffs (though the market could have a re-think on that at any point).
4) Weaker dollar
One thing that Bessent has floated is allowing the currency to do the work. Rather than tariffs and trade wars, there is a way for Trump to accomplish his main goals (US reshoring, better trade balance, stock market gains) with a weaker currency, provided there is international, buy-in, particularly from China.
5) Japan turning up
Japan is rolling out a $141 billion economic package with a focus on boosting wages. BOJ Governor Ueda also talked about domestic wages as a driver of inflation. He also said they will continue to raise rates and the market sees a 61% chance of a hike on Dec 19. Now there is some domestic weakness as well, so this is a finely-balanced discussion but there is some divergence with the US in place.
You don’t have to look beyond what happened earlier this year to get a sense of how this can go. As 10s fell from 4.6% in June to 3.6% in April, the pair fell 2000 pips. That’s what happens when levered carry gets unwound.