USD/JPY will continue to struggle to break higher in the short term, with the currency pair restrained by capped US yields. Indeed US Treasury yields have slipped over recent days. The range bound trading pattern for USD/JPY has resulted in a declining trend in both implied and realized volatility. The drop in volatility has been particularly sharp, with 1 month volatility at an extreme level according to our z-score analysis.
The implication is that it is cheap to USD/JPY volatility although it may need a trigger from a further increase in US yields and / or major improvement in risk appetite to spur an increase in volatility. Comments by the Bank of Japan’s Iwata yesterday that its not necessarily good if the JPY keeps depreciating is not conducive for higher volatility in the currency pair but likely further stimulus from the BoJ alongside wider yield differentials with the US, will mean that downward JPY pressure will resume soon at a more rapid pace in the months ahead.