USD/JPY: moving sideways after Yen drops back vs the greenback, waiting FOMC - Scotiabank

Analysts at Scotiabank explained that the JPY has been underperforming retreating modestly from Tuesday’s fresh two-month high.

Key Quotes:

"Headline risk remains dominant following comments from Chief Cabinet Secretary Suga as he pushed back on Trump’s allegations of devaluation, calling them ‘totally inaccurate’."

"Suga also stated that he was ‘watching currency market moves with vigilance’ and stated a willingness to ‘take firm action’."

"In terms of fundamentals, the 2Y U.S.-Japan spread has remained stable around 140bpts since late 2016."

"We note the risk of a continued (JPY-negative) widening in response to the FOMC."

"However sentiment is providing an important offset and appears to be dominant in the current environment, as we note the decisive turn in risk reversals and material rise in the premium for protection against JPY strength."

"Reminder that JPY is vulnerable to kneejerk, haven-driven gains in periods of risk aversion."