Dollar-yen rose to new nearly eight-year highs over Y123.00 Tuesday, with the move seen as being driven more by Fed lift-off views being brought forward than by anything specific from the Bank of Japan.
Traders saw the current rally in dollar-yen as overdone, especially with U.S. Treasury yields on the defensive at the start of a new week, but were reluctant to fight the weak yen trend.
Dollar-yen was trading at Y122.90 in afternoon action, on the high side of a Y121.52 to Y123.32 range.
The decisive break above the twin peaks of the Dec. 8 highs near Y121.85 and the March 10 highs near Y122.03, with followthrough above Y123.00, has the market targeting a test of Y124.14, the high from June 22, 2007.
There was much debate about why dollar-yen suddenly has shot higher in recent sessions.
Analysts had not looked for the yen to slip sharply until after key trade legislation between the U.S. and Asian-Pacific countries has been hammered out.
A noticeably weaker yen could make Trans-Pacific Partnership discussions more contentious, they said.
In a 62-to-37 vote late Friday, the Senate approved legislation to renew Trade Promotion Authority for President Barack Obama, sending the bill to the House where it is likely to be taken up in the early weeks of June.
Both the House and Senate are scheduled to be out of session next week and return to Washington on June 1.
The Senate narrowly rejected a high profile currency amendment sponsored by Republican Sen. Rob Portman and Democratic Sen. Debbie Stabenow.
The Portman-Stabenow amendment would have required American negotiators in the Trans-Pacific Partnership talks to ensure that enforceable currency provisions are in the final TPP, which would prevent any of the 12 signatories from being vulnerable to charges of artificially manipulating their currency. See MNI mainwire at 21:25 p.m. Friday for details.
BoJ views have not greatly shifted much either, with any further stimulus seen as unlikely until later in the fiscal year.
In comments Friday, at the conclusion of a two-day BoJ meeting, Governor Haruhiko Kuroda Friday sought to keep expectations for additional monetary easing at bay by stressing consumption is picking up after a prolonged slump caused by the April 2014 sales tax hike.
He also told reporters after the bank's two-day policy meeting that stronger-than-forecast Q1 GDP growth of 0.6% on the quarter indicates that the positive growth mechanism -- from higher output and income to higher spending - has been working.
"At this point, I don't see any need for additional monetary easing," Kuroda said. "But if the price trend changes and if we judge it's necessary, we won't hesitate to take action as appropriate."
And as projected in the bank's semi-annual Outlook Report, inflation is likely to be anchored around 2% in the first half of fiscal 2016, he said.
"We are not considering conducting additional easing. The price trend hasn't changed," he added. See the MNI mainwire story at 3:46 a.m. ET Friday.
Japan's Nikkei 225 closed up 0.12% at 20,437.48 Tuesday, after posting a high of 20,473.85, a new 15-year high. The focus is on a move back to the April 12, 2000 high at 20,833.21.
At today's close, the Nikkei 225 is up 17.1% year-to-date.
BOA Merrill Lynch's monthly fund managers survey, taken May 8 to 14 and released May 19, showed that a net 42% of global fund managers were overweight Japanese equities this month, compared to a net 38% overweight in April and a net 40% overweight in March.
While Japanese inflows have not changed much in recent months and may not change much going forward, outflows are another story.
"In Japan, we expect evidence on capital flows (GPIF Q1 results in particular) to confirm capital is still pouring out of Japan and with short JPY exposure outside Japan at a three year low (on our own measure) this tips the balance in favor of further JPY losses," said strategists at RBC Capital Markets in a note.
RBCCM referred to expected outflows by Japan's Government Pension Investment Fund, which starting in April 2015, has increased its target allocation to international bonds to 15% from 11% and to international stocks to 25% from 12%, with a permissible range of deviation of +/-4% for bonds and +/-8% for stocks.
The strategists favored a sterling-yen long around Y188.88, with a topside target of Y193.00 and a stop-loss at Y187.00. Sterling-yen held at Y189.34 in afternoon action Tuesday.
Earlier, CitiFX technical strategists closed their dollar-yen long (put on May 20 at Y120.89) at Y123.25.
"We are growing increasingly concerned with the set-up for Equity Markets," they said, with scope for yen demand as a result.
In addition, technical patterns for USD/JPY suggest a that the pair may be topping out for now.
"While we remain bullish on USD/JPY in the medium term, these dynamics suggest that there are better ways to play USD strength in the near-term," CitiFX said.
For dollar-yen to firm further, much will depend on whether U.S. Treasury yields can shake off safe-haven Greek demand and react more strongly to views that despite mixed data, the Federal Reserve is likely to begin normalizing policy this year.
Last Friday, a mostly upbeat Federal Reserve Chair Janet Yellen said "it will be appropriate" for the Fed to start raising the federal funds rate from near zero "at some point this year" if the economy performs as she expects.
To support an initial hike in the funds rate, Yellen said she would want to see "continued improvement in labor market conditions" and become "reasonably confident" inflation will move back to 2% "over the medium term" -- the same two conditions the Fed's rate-setting Federal Open Market Committee has listed in its last two policy statements.
Downplaying apparent first quarter economic weakness, Yellen strongly suggested those conditions will be met if her fairly optimistic economic forecast is fulfilled.
Ten-year U.S. Treasury yields held at 2.148% Tuesday
Ten-year yields have risen from a low around 1.809% on April 3 to a high near 2.366% May 12. Subsequently yields have been trading roughly between 2.10% and 2.30%.
The run-up in U.S. yields has served to underpin dollar-yen to a degree only.
Instead, last week's decisive break above Y121.00 in dollar-yen was driven by shifting expectations about when Fed lift-off might occur.
Some of those who thought the Fed might wait until early 2016 to begin raising rates had a rethink about this after Yellen's comments last Friday.
In terms of positioning, yen short positions are not yet extended, making a dollar-yen long a logical way to express U.S. interest rate expectations.
Friday's CFTC data showed that speculative accounts had a net yen short of -22,005 contracts as of May 19, compared to the previous week's net yen short of -30,769 contracts.
In contrast, speculative accounts had a net euro short of 168,339 contracts as per May 19, a sharp contraction from the record net short of 226,560 contracts, seen March 31.
A contract size over 100,000 is generally viewed as extended.