The Japanese Yen has gained 0.2% against the US Dollar, performing better than most G10 currencies during Monday’s North American session. This rise comes amid ongoing trade tensions, especially with the upcoming visit from the US Treasury Secretary and recent comments about the trade imbalance in vehicles. Japan’s core machine orders and the monthly tertiary industry index have surpassed expectations, signaling positive economic trends. The economic calendar is busy, with upcoming trade and national CPI figures that will affect the Bank of Japan’s policy decisions on July 31. There are also reports suggesting a possible adjustment to the inflation forecast.

Japanese Bond Yields

Japanese Government Bond yields are increasing, creating more favorable conditions for Japanese bonds. Short-term risks seem to lean toward a decrease in the USD/JPY rate, which may return to the lower range of 142.50-148.00 seen since early April. What we see in the Yen is more than just a brief response. The steady 0.2% rise against the Dollar may seem small, but it has greater significance given its strong performance compared to most G10 currencies. This movement often reflects a shift in expectations linked to not only current headlines but also deeper underlying trends. In this instance, the rise follows several positive economic indicators and increasing domestic yields. Japan’s core machine orders and tertiary activity both showed better-than-expected results, serving as key indicators for capital spending and service sector health. Such figures are closely monitored, and their strong performance suggests a domestic economy that might be improving, or at least showing resilience. While a single month of data doesn’t necessarily indicate a trend, it starts to change our perspective on the potential for ongoing economic weakness. The coming week doesn’t allow for a break. With national CPI data and trade statistics due, we can expect new insights into Japan’s inflation situation. Markets speculate this could affect the Bank of Japan’s inflation outlook. If this speculation holds true, even partially, the Yen may attract more investment as positioning shifts toward a more active central bank. So far, Tokyo’s policy has leaned heavily toward patience, but rising government bond yields indicate that this patience may be starting to run thin.

Central Bank Speculations

From our perspective in derivatives, the USD/JPY pair is shifting. Although the decline isn’t dramatic, it’s becoming harder to overlook. Since early April, a solid support level has formed around 142.50, with peaks near 148.00. Prices are bending toward this lower range again, and the weakening Dollar strength alone isn’t enough to alter this path. It may not drop immediately, but ongoing week-to-week pressure is pushing in that direction. We should now observe short-term implied volatilities and the curve for one- to three-month tenors. If these start to steepen downward, especially alongside renewed Yen strength, it could support strategies that favor a drop in Dollar-Yen rates. This doesn’t mean making large bets, but reviewing current strategies to ensure they align with shifting conditions, especially if risk reversals begin to favor the Yen. Much will hinge on the BOJ meeting on July 31. Leading up to that, traders should view the CPI and trade data as part of a tightening narrative, rather than isolated events. If we interpret high input prices or a strong trade surplus correctly — particularly in light of recent tensions regarding vehicle exports — the case for potential yield support becomes stronger. Bond spreads are already moving in a positive direction for Japanese debt holders. This should not be dismissed as merely a technical detail. It reinforces the Yen’s strength, especially as US policy is seen as nearing its peak. As this narrative gains traction, the rate differential supporting Dollar strength will become less convincing. We recommend rebalancing exposure. This doesn’t mean completely giving up on Dollar gains, but rather moving toward more balanced strategies that allow for occasional Yen strength. This situation rewards flexible positioning rather than sticking to a single outlook. Create your live VT Markets account and start trading now.

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