Despite deteriorating US fiscal conditions, dollar weakness and yen strength have remained limited, while expectations for a BoJ rate hike and developments at Jackson Hole could determine the direction of USD/JPY. The relationship between long-term yields and real interest rates is another key focus.
USD/JPY fell briefly to 155.23 after coordinated intervention before edging higher through August. However, gains stalled just below 160, and after the US Treasury announced an expansion of its bond buyback program on 19 August, falling long-term yields sent USD/JPY down to 158.03. The pair subsequently recovered again to around 159.
Movements in US long-term yields have influenced the dollar, and the relationship between long-term yields and the Dollar Index reversed again from July onward. Although a rising term premium has contributed to dollar weakness, the dollar is thought to have received some support from safe-haven demand and higher oil prices.
In Japan, long-term yields have risen to just below 3%, while the market is pricing in an approximately 80% chance of a BoJ rate hike in September, and real interest rates remain in negative territory. The low level of real interest rates is seen as one reason why further BoJ rate hikes may not readily support the yen.
Next week, remarks by the BoJ Deputy Governor and discussions at Jackson Hole are expected to be the main focus. As USD/JPY continues to trade in a range of 158 to 160, cross-yen pairs are expected to remain firm, although the risk of increased yen buying depending on developments in the US and the Middle East will require attention.