BUZZ-COMMENT- Yen's appeal grows stronger as risk appetite falters

A fifteen-year high in JGB yields, a U.S. economic slowdown, bearish seasonals, and geopolitical discord create a challenging environment for USD/JPY bulls.

On Thursday, USD/JPY hit a year-to-date low as U.S. stocks and Treasury yields declined following weak economic data and Walmart’s cautious outlook on the U.S. consumer. Political tensions over Ukraine and potential tariff implementations in March further enhance the yen’s appeal as a haven.

So far this year, the yen’s steady appreciation has been largely driven by rising expectations of Bank of Japan rate hikes and higher JGB yields amid increasing inflation. Reports on a meeting between BOJ Governor Ueda and Prime Minister Ishiba suggest that authorities are tacitly accepting yen and yield gains, with Japan's national CPI reading due on Friday.

The surge in JGB yields may also positively impact the yen by affecting margin on global bond portfolios. It remains unclear whether falling JGB prices influences Japanese holdings of overseas equities, though the yen's sensitivity to equity prices appears to be increasing. An announcement by the government pension fund in March regarding allocations may shed light on recent shifts in Japanese portfolio holdings.

Yen buying on Thursday, however, has been primarily driven by model and speculative accounts adding to yen longs. Historically, the third week of February has been particularly sensitive for markets (Ukraine, Covid), while seasonal trends suggest yen volatility over the next couple of weeks.

Fading rallies remains the preferred strategy until the December 3 low of 148.64 is breached. Nearby resistance is at the February 7 low of 150.93.

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