October 13, 2022

Justin McQueen, Market Analyst at Capital.com

The focus for markets has been on the all-important US inflation report. In the lead-up to the risk event, USD/JPY has moved from strength to strength hitting fresh multi-decade highs with market participants seemingly more comfortable with the reduced risk of FX intervention from the Bank of Japan. This seems to have also been expressed among the retail crowd as we have seen traders on the capital.com platform increase their long exposure in USD/JPY, which currently stands at 61% net-long in the UK. 

With USD/JPY closely correlated to US yields, bullish trader sentiment may be due to two factors here — the persistent strength in the US dollar, which continues to be backed by a hawkish Federal Reserve, and rising US yields.

Adding to market confidence is Bank of Japan Governor, Haruhiko Kuroda, who once again noted the benefits of a weaker Japanese Yen, which suggests there is little chance of a pivot away from the BoJ’s ultra-loose monetary policy in the near term. 

Traders will likely use this to buy the dip in the pair given that the divergence of monetary policy remains firmly in favour of the dollar over the yen.

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