USD/JPY: USD supported as 10-year auction attracts highest yield since 2007

• Treasury rates remain attractive: 2-year at 5.009%, 5-year at 4.428%, 10-year at 4.288%, and 30-year at 4.370%
• US inflation report expectations are for core readings to remain subdued, while headline jumps on rising gas prices. CPI M/M: 0.6%e v 0.2%; Y/Y: 3.6%e v 3.2% prior; core m/m: 0.2%e v 0.2% prior; y/y: 4.3.%e v 4.7% prior
• Fed rate hike expectations are pricing in slightly a greater chance of more tightening this winter. Implied rate peak at 5.452% vs 5.446% last Tuesday.

USD/JPY is not ready to turn bearish despite BOJ Governor Ueda’s verbal intervention that kicked off the trading week.  The higher for longer and risks of more Fed tightening could keep the dollar supported a little while longer.  This afternoon’s US 10-year auction went as planned, awarding 4.289%, which was the highest yield since 2007.  Yesterday we saw strong demand for the Treasury’s three- and six-month bill auctions.  The flows that are coming the dollar’s way are not going to be easing anytime soon and that should provide a level underlying support for the dollar. The big risk for the dollar is if inflation cools and economic resilience quickly vanishes.  A bearish dollar outlook should not be the base case just yet, but if the data suggests that is happening currency markets could jump on that trade.

While dollar strength has resumed it is still over 50 pips away from levels that trade before BOJ Governor Ueda’s comment on a ‘quiet exit’ reducing monetary policy easing.  This week will either see a resilient US economy force more jawboning from Japan, or support the belief that the Fed’s done raising rates.  Initial support resides at the 146.80 level, followed by Monday’s low of 145.90. To the upside, key resistance is provided by the 147.90 level, followed by the psychological 150 handle.

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