[Calxy]

The interest rates and not equities are the main driving force behind the move lower in USD/JPY and that this pressure should eventually abate. US-Japan 3m interest differential is a strong driver of USD/JPY relative to its own history. A regression including the 10yr yield differential tells the same story.

Right now, the US 10Y US-Japan yield differential is at its lowest level since the beginning of July. Market fixed income analysts think that the US 10-year yield could rise to 3.8% on the back of rising supply in the coming weeks. They also think that the 10-year JGB yield could squeeze higher over the same period, but by significantly less and to 1.55%. They expect growing concerns about DPJ policy financing to add to a positioning squeeze. This would lead to a 25bp widening of the 10-year yield spread in favour of the US, which should be a positive for the USD/JPY in coming weeks. In the mean time, the US non-farm payrolls data will be an important event for USD/JPY.