USD/JPY traded down from a high of 121.39 in London to a low of 120.69 on Friday on the back of Chinese measures to cool down its economy more (tightening of monetary policy) and widening of the Chinese yuan trading band. It has come back strong however on the back of fresh interest in carry trades and reports that the German FinMin was not concerned over current EUR/JPY levels.
The one-yen plus rally in EUR/JPY helped USD/JPY regain the 121 handle. A low VIX index and low option volatility point to very low risk aversion and continuing demand for JPY-funded carry trades. USD/JPY remained relatively bid going into the New York close, consolidating on 121. The prognosis may be for more yen weakness this week.
Asian bourses are generally expected to trade soggy after the Chinese measures but not provoke any major rise in risk aversion. Japanese importers are likely to be good buyers from this week as well as month-end settlements approach and with USD/JPY at significantly higher levels than last month. Dips will likely be bought aggressively, limiting the downside.
Topside, offers remain from Japanese exporters and option players defending 121.50 barriers. With specs eyeing the upside, it may be only a matter of time before these are history. More barriers are eyed above at 121.75 and 122.00, however. USD/JPY currently trades 121.14/17.
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