The FX Trader: The JPY is spinning into the abyss

What to know: quick bullets

• The Japanese yen is suffering an accelerating meltdown on the emerging market playbook for the currency as yields rise sharply for long JGBs. The spread between US and Japanese 10-year yields is hitting new lows since early 2022 as Japan appears intent on pursuing a negative real rates policy to dig itself out from under its mountain of debt. There are some echoes of the Liz Truss mini-budget moment for sterling back in late 2022, if without the disorderly panic…yet. Will the announcement tomorrow of the new fiscal package (Reuters has had a look at a draft that suggests it will be around USD 135 billion, which is about 3% of Japan’s GDP) trigger a further immediate slide or spark some consolidation in this recent move and will Japan’s officialdom show any signs of fighting back against this devaluation of its currency, when it has tremendous firepower to do so? After all, the LDP suffered one of its most remarkable defeats in the recent elections, with the number one concern on voters’ minds the level of inflation, with this move in the currency like so much gasoline on the inflationary fire. Note that Japan’s National CPI data will be released tonight (early Friday in Japan). A BoJ official spoke in favour of hiking rates on such significantly negative real rates, but this only sparked about three basis points of upside in the benchmark 2-year yield, and really that move is more likely about the reflexive adjustment needed in the BoJ forward curve because of the JPY move itself.
• Low volatility days across rest of FX are probably over if USD poised for breakout. The JPY was already taking care of business in driving a fresh rise in FX volatility, with USDJPY 1-month rising sharply above 10.5% implied volatility, a high since July. Adding to the volatility potential is the technical situation for the USD on the expansion in volatility across USD pairs tomorrow, of course led by USDJPY, but also as the broader USD index is poised back at 100.30+ resistance and looks ready for a break higher, perhaps to 102.00. EURUSD is close to the psychological trigger point of 1.1500 and GBPUSD is nearing 1.3000. The Fed minutes suggested reluctance to cut in December, given the lack of data, while Nvidia’s earnings report brought back risk sentiment, so far at least, in the US equity market. Are we set for a risk-on, higher US yields, higher US dollar blitz all the way into year-end?
• US treasury markets are a potential key, but don’t seem a necessary ingredient here. Action in US treasury markets has been bottled up in impossibly tight ranges. Hard to see much happening at the short end of the curve until we get the November US jobs data (that report will be delayed until after the December 10 FOMC meeting), but weakness in US treasuries and move in the 10-year through 4.15-4-20% for whatever reason.

Chart focus: USDJPY
USDJPY is melting up, a move that unfolded even before the hurdle of the Nvidia earnings report after the US market close yesterday was removed. The lack of noise from Japanese officialdom on the yen devaluation move thus far is deafening, leaving the market to its own devices with further risk of JPY downside as long as there is no official pushback or countering developments elsewhere. Friday’s fiscal package announcement in Japan may set the tone for whether we go on to test multi-decade highs her quickly in coming days or hit a period of consolidation if Takaichi announces what has already been circulating per the Reuters story noted above. Technically, the chief focus is on the highs since the 1986 into 162.00+, given the strong momentum established by this latest move. The only way to save the “ascending wedge” technical setup discussed in my Tuesday update would be with an immediate sell-off in the coming session or two that erases this massive extension higher.