BoJ hike odds rise, USD/JPY remains elevated
The Japanese Yen is not finding lasting support despite sharp moves in Japanese money markets. Markets now price a high probability of a Bank of Japan hike in September, narrowing US–Japan swap differentials.
The two-year US:Japan swap differentials have narrowed nearly 40bp since mid-July, which should be weighing on USD/JPY. However, benign conditions continue to favour the yen-funded carry trade, keeping USD/JPY elevated.
Rising risks for Yen funding are expected, and if Fed rates stay unchanged, USD/JPY could fall below 158. This may lead to increased focus on short CHF/JPY positions to play independent yen strength.