The JPY has been the weakest currency of the year. Check it out here on the currency strength monitor from Financial Source.

It wasn’t the BoJ board that helped strengthen the JPY as they had been reluctant to act at the last BoJ meeting preferring to not intervene in FX markets. There is wisdom in that decision since it is very hard to manipulate currencies and many nations have failed in the past like the RBNZ and the SNB.

Instead, the weakness in the JPY looks like it has been been finally limited by a recovery in the debt market. US 10 year yields have moved lower on fears over. Coming US recession. The US10-02 yield inverted around the end of March this year and the Fed is hiking rates just as growth is starting to show. This has been the drag on the USDJPY strengthening the JPY.

So, is this the catalyst for some correction in the heavily over-sold JPY? The technical picture would favour selling on a re-test back up to the broken trendline in the 129.50 and 130.00 region. The key to this level holding will be a further move lower/pressure for US 10 year yields to move lower. The more likely the US is seen as heading into a recession the lower the US 10-year yields should fall as the longer end of the curve tends to respond more to growth expectations.

If recessionary fears fade, then the longer end of the curve should steepen again and that could mitigate some of the strength in the JPY.