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USD/JPY Update for Oct 22, 2021

The USD/JPY continued its modest gains from the previous day into the start of European trading, although it lacked punch, and was last seen trading around the 114.00 level.

The pair built on overnight weekly lows and gained some traction at the start of trading on Friday. Reports that China Evergrande has provided funds for a bond coupon into escrow, helped ease concerns about a credit crunch in China’s property sector. This in turn weakened the safe-haven Japanese yen and provided a tailwind for the USD/JPY pair.

On the flip side, the US dollar has so far struggled to capitalize on the previous day’s modest recovery from its three-week lows. This was seen as a key factor that failed to provide any additional boost to the USD/JPY pair, ending the early uptrend near the 114.20 area. However, the downtrend is being cushioned by a further widening of the yield differential between USand Japanese government bonds.

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The yield on the 10-year U.S. Treasury note rose to 1.683% on Thursday, its highest level since May 13, on expectations that the Fed will soon tighten monetary policy. Speculation was boosted by comments from Fed Governor Christopher Waller, who said the U.S. central bank may need to act more quickly if inflation remains high through the end of this year.

Conversely, the yield on the 10-year Japanese government bond remained near zero due to the Bank of Japan’s policy of managing the yield curve. This warrants some caution for aggressively bearish traders and against positioning for an extension of the recent pullback from the near four-year highs reached earlier this week.

Market participants now await the release of the US Purchasing Managers Indexes, which will provide fresh impetus later today in North America. This, along with US bond yields, will influence USD price momentum. Traders will be guided by the overall risk sentiment in the market to identify short-term opportunities in the USD/JPY pair.

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