Despite coming off an extremely low base any upside movement in Japanese rates is likely to spook the carry trade element of the market. This was highlighted by the sharp Yen appreciation overnight following a hawkish set of remarks from the BOJ Governor.
Fukui's remarks hint at preparing the market for a rate hike sooner rather than later and smack of a preemptive strike against inflation. His remarks follow on from last week's suggestion that rates could move before the year is out. USD/JPY topped out at 118.47 last session, just shy of the rumoured 118.50 option barriers. The pullback, gradual initially, reached 118.17 by the NYK close then fell at a faster pace to 117.66 at the Asia/Europe hand over.
Talk that a Japanese agency bought small USD's at 117.70 triggered a modest short covering bounce to 117.90. Steadier trade through early Europe with offers at 117.90-118.00. To the downside stops are rumored under 117.50. Option barriers at 118.50 and are now joined by plays at 119.50. Expiries include 118.50 and 117.00 strikes. Dollar is in trouble should USD/JPY close below 117.80, 10-day average and former trend support line.
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