A USD/JPY Caution Pre FOMC Minutes

Don’t expect too much USD/JPY upside from the FOMC minutes.

Some are expecting a fair bit.

[The minutes are due to be released at 1800 GMT.]

Given the perceived dovishness of Chairman Bernanke’s comments in the wake of the latest FOMC meeting and the subsequent decline in US yields, there is some risk that the FOMC minutes will read as more hawkish.
 
Chiefly, a wider divergence between Fed members should come out than was shown by the post-meeting press conference – with some in the Treasurys markets hoping that this could give a fillip to yields.
 
And that, as we know – given the oft-cited inverse correlation – has implications for the USD/JPY trade – a possible rebound could be seen.
 
But Big Yield-Playing Banks are warning that it looks doubtful any rise in the currency pairing would be sustained.
 
 The main reasons:
 
The downtrend in US yields was already in place by the time of the last FOMC meeting, suggesting the extent of the influence wielded by changing views within the Fed’s thinking might be overstated.

Also, the move in yields looks to be as much about positioning as about any shift in fundamentals.

[The chart shows hedgies are heavily ‘into’ yield right now, which implies increased sensitivity of any correlation between USD/JPY and Treasurys]

One of the Big Yield-Playing Banks says its positioning monitoring indicates “hedge funds built a significant short fixed income position over the past several months and the correlation between returns and yields has recently been heading higher into stretched territory.”
 
In that case, the recent pullback in yields may have been driven partly by short covering in fixed income with further scope for this to run.
 
That Big Bank runs a few chart factors as back-up, but even without them, the scenario seems more than plausible to me.
 
“Against this backdrop, we believe that any rise in US yields in response to the minutes is likely to prove temporary and could provide a tactical opportunity to sell USD/JPY.”

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