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USDJPY threatening a new squeeze if yields don’t drop… US yields have done almost nothing but continue to rebound since the FOMC meeting last Wednesday, as the market has decided that the Fed’s easing intentions are well flagged and already in the price. The action in USDJPY has continued to pressurize back higher as well after the botched break-down attempt on FOMC night. With yesterday’s close clear of the 200-day moving average and highest daily close outside of the two-day spike around the prior FOMC meeting, USDJPY appears set to challenge higher once again as long as US treasury yields remain on an upward path. How will the Bank of Japan and/or Japan’s Ministry of Finance respond if USDJPY breaks higher? With simple brute FX intervention, with threats to tighten policy more forcefully – with other, newer measures that approach capital-controls light or other forms of financial repression? Surely the BoJ/MOF have been preparing for this day?

This situation might have happened earlier if Japan hadn’t been “lucky”. Recall back in late July, when the Fed me on July 30 and the BoJ the following day, a Thursday. The two meetings set a USDJPY spike in motion that spiraled above 150.00 (even if US yields were relatively quiet at the long end around then) as the Fed failed to wax dovish and the BoJ continued to ignore realized inflation. The spike was only tamed by the huge ugly negative revisions in the US payrolls the following day on Friday, August 1.

In any case, let’s remember that Japan is massive source of global liquidity, with its enormous surplus net international investment position. Any major policy move that results in a tightening of Japan’s liquidity and even a repatriation flows back to Japan will have global implications – potentially also knock-on effects into the US treasury market that leads to an eventual policy response in the US as well. And any aggravated rise in long yields globally could also re-pressurize the focus on France’s debt. France-Germany spreads posted a local cycle high yesterday above 82 basis points – with the all time high in that spread since

In short, a USDJPY move above 150.00 can set in motion a significant train of consequences around the world. If US treasuries manage to piece together a rally due to a risk off move in global equity markets or for whatever reason in coming sessions, we may never really challenge to the upside in USDJPY meaningfully, thus derailing all the above concerns. I view any move above 150.00 as likely to prove of relatively short duration under almost any circumstance as the yen is extremely undervalued. But grappling with the volatility could prove tricky – be forewarned.

Chart: USDJPY USDJPY broke above its 200-day moving average for the first time since the end of July (and that was a one-day affair – before that USDJPY has traded below its 200-day since early this year), but still trades within the recent range, and perhaps more importantly, south of the psychologically key 150.00 (also a level possibly likely to mobilize Japanese officialdom). Beleaguered bears don’t have much to hang on to here, needing this latest move to be stuffed back into the lower range to gain some confidence, while bulls will likely face stiff official resistance and choppy price action if a squeeze develops above 150.00 as noted above.

Looking ahead The US government shutdown risks are foremost here for global risk sentiment, perhaps, ahead of next Tuesday’s September 30^th deadline for a deal on further funding. President Trump has recently cancelled a meeting with Democrats, suggesting he may be willing to take this to the wire or even beyond. Today, Politico ran a story after getting hold of a Republican memo on possible mass firing plans for some bureaucrats and federal employees should a government shutdown occur. It feels like the two sides are spoiling for a fight, but the event betting markets only rate a government shutdown risk at 61% likely, actually down quite a bit from the worst levels of late – how reliable an indicator is that?

FX Board of G10 and CNH trend evolution and strength. Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.

What could be more pivotal? We have a 0.0 trend reading for the US dollar now after the recent USD rally – sounds about right, given the wider picture. Elsewhere, the JPY remains weak, but sterling a bit weaker today (more below on GBP) and NZD weakness is hyperextended now after the recent weak NZ GDP print.  Note that ATR rankings are solid “cold” blue – this market needs to pick up the trading ranges together with any new trend readings for better traction.

Table: NEW FX Board Trend Scoreboard for individual pairs. Sterling weakness is becoming more prominent now, with EURGBP poking at range highs and GBPUSD set to flip into a negative trend on the day at current levels.