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COMMENT-USD/JPY reflation thesis under pressure from inflation numbers

USDJPY+0.58%

 In other matrices, USD/JPY, seems to be ready to stage some recovery after the U.S. CPI data due Wednesday.

It is now hovering just below its 200-day moving average and the critical support level of 152, thanks to rising Treasury yields in the buildup to the inflation data out today.

The behavior of USD/JPY will depend primarily on how the data will affect risk appetites. The latest yen sellers are expecting an improvement in external demand as well as a possible cut in the fed fund rate next week. Further, positive sentiments stems from expectations that the Bank of Japan will maintain its hike only in the New Year.

As such, USD/JPY has been following movements in reflation trades including higher gold price, stronger yuan and a steeper Treasury yield curve.

Nonetheless, this environment might not be sustainable if the yield curve flattens and risks’ tone shifts worse after the November inflation data come in at 0.3% mom.

It is plausible that Treasury 10-year yields will keep pushing up the momentum through the re memeberisation more than the carry yen effect. That is why low levels of futures open interest indicate that traders are afraid to return to the latter and not put pressure on Japanese authorities.

Above 152, nearest supports are the 21-MA at 152.75, the Oct. 23 high at 152.19, and the weekly cloud top at 153.15. A dip below 151 and the daily cloud top of 150.52 will act as a bearish sentiment eraser to the pair.