USD/JPY to see a slow grind higher – OCBC

The USD/JPY pair is supported by back-end UST-JGB yield differentials. But a move higher will be a slow grind as the pair runs higher above short-term implied valuations, as economists at OCBC Bank note.

Narrowing of UST-JGB yield spreads in Q2 not a concern

“Compression in yield differentials between USTs and JGBs reversed in 1H 2021, and gave USD/JPY considerable tailwind. While the pace of widening stalled in 2Q 2021, the underlying view remains for higher back-end UST yields, and therefore further widening into 2H 2021. 

“Outflows from Japan to foreign bond markets have eased this year, with the attendant hedging dynamics implying a positive driver for USD/JPY.” 

“Overall, we are still positive on the USD/JPY, though the higher base implies that the extent of gains in the pair will not be as much as in 1H 2021.”