Japanese Yen strengthens against the US Dollar with US markets closed

• The Japanese Yen is trying to claw back while US markets are closed.
• 30-year bond auction goes smoothly despite concerns about the end of bond buying.  
• The US Dollar Index took a hit on easing US economic data and traders softer, just above 105.00

The Japanese Yen (JPY) strengthens to around 161.00 against the US Dollar (USD) on Thursday while the US markets are  closed for a public holiday. The move comes after a 30-year sovereign Japanese bond auction went extremely smoothly, while markets were concerned the government would have issues allocating it, with traders still concerned about the Bank of Japan (BoJ) ending its bond-buying program. Some positive news thus for the Japanese Yen which is trading higher against the US Dollar. 

Meanwhile, the US Dollar Index (DXY) – which gauges the value of the US Dollar against a basket of six foreign currencies – took a hit on Wednesday with a very packed economic data calendar.. The main takeaway from all data was that nearly every data point came in a softer or below consensus view, which points to the US economy starting to slow down. 

Daily digest market movers: Risk in the balance

• Bloomberg reports on a piece from RBC BlueBay Asset Management that sees a risk that the Bank of Japan could announce a bigger reduction in its bond purchases than markets expect. Add in there another rate hike, and a double whammy of hawkish forces could trigger a firmly higher Japanese Yen. 
• Swap traders see swap rates on forward contracts swing higher, pointing to a higher possibility for another rate hike on July 31. The surge in swap points started on June 18, when Governor Kazuo Ueda alluded that another rate hike is in the cards. 
• Equities are in the green across the board, led by the Japanese Topix and Nikkei 225, which both closed just below 1%. European and US equities are doing well despite lower volumes out of the US. 
• The CME Fedwatch Tool is broadly backing a rate cut in September despite recent comments from Fed officials. The odds now stand at 67.3% for a 25-basis-point cut. A rate pause stands at a 26.5% chance, while a 50-basis-point rate cut has a slim 6.2% possibility. 
• The Overnight indexed Swap curve for Japan shows a 48.2% chance of a rate hike on July 31, and a smaller 39.8% chance for a hike on September 20. 
• The US 10-year benchmark rate trades at the lower end of this week’s range near 4.36%, and will remain there as the US bond markets are closed on Thursday.
• The benchmark 10-year Japan Treasury Note (JGB) trades around 1.08%, easing from the daily high of  1.097%.

USD/JPY Technical Analysis: That might work as well

The USD/JPY still has that sword of Damocles hanging over it, with that possible intervention from the Japanese Ministry of Finance. However, the research paper Bloomberg picked up from RBC might be an alternative approach. Should the Bank of Japan announce that it is hiking interest rates, while trimming or even completely closing down its bond buying program, markets would go cold-turkey on the double hawkish intervention. JPY would rally firmly across the board while yields would be spiking higher, and would see USD/JPY fall through the floor. 

With the Relative Strength Index (RSI) now firmly overbought in the daily chart, a correction looks to be imminent. First support at 160.32 would already be a key level. Should that level breaks, a nosedive move would be inevitable with USD/JPY heading to either 157.03 (55-day Simple Moving Average) or the 100-day SMA at 154.26.

USD/JPY Daily Chart