USD/JPY Rally Accelerates With Treasury Yields

USD/JPY's rally accelerates further today as more investors are scaling back expectations for Fed to announce additional easing in the near future. That's be very well reflected in this week's sharp rally in US Treasury yields. The 10-year yield jumped strongly in late New York trading overnight t o close at 1.805% after hitting a three month high of 1.812%. The picture is even more drastic if we compare with the intraday historical low of 1.394% made on July 24, i.e., less than a month ago.

The 30-year yield also rose further to close at 2.914%, comparing to the intraday record low of 2.452% made on July 25. USD/JPY's break of 79.13 resistance today bears short-term bullish implication and we're now looking at the next resistance level at 80.61 in the near-term. The dollar is also broadly firm except versus Canadian dollar.

A key event ahead in the month is Fed Chairman Bernanke's speech at Jackson Hole conference in August 31. Recent mixed to positive data from US dented the hope for Bernanke to announce anything significant in this traditionally important event. The markets are still leaning towards the case for Fed to do another round of easing. But that would require some substantially weak economic data to push Fed to act. The solid retail sales and job data in July did release much immediate pressure from the Fed.

Talking about Fed, Minneapolis Fed Kocherlakota said yesterday that policymakers may have to "give a little bit on the inflation front to do better on the employment front." That is, with unemployment at the current high level, allowing inflation to breach the 2% target "could well be part of an appropriate policy." Richmond Fed Lacker said that " lot of people overestimating the extent to which monetary policy is capable of having any sustained effect on growth or labor markets," and Fed's power to fix the economy is limited.

In Europe, it's reported that Spain's Bankia will receive an emergency disbursement from the EUR 100b Spanish bank bailout program soon. Bloomberg reported that's due to dropping for the plan for Bankia to get loan from ECB due to restrictions imposed on bank borrowings. In Greece, it was reported that prime minister Samaras will meet with Luxembourg prime minister Juncker, German chancellor Merkel and French president Hollande next week to persuade eurozone leaders to extend the time of austerity from two years to four years, up till 2016. The plan could involve additional EUR 20b funding. Markets will pay attention to how the story develops.

In China, Xinhua News reported that Premier Wen Jiabao said during a tour to the Eastern province of Zhejiang that there's room for further easing as inflation softened. While warning that downside risks to the economy remained "relatively large," Wen affirmed the country has the "conditions and capabilities, and will be sure to fulfill this year's economic and social development targets." The news provided some support to Asian equities.

On the data front, New Zealand business NZ manufacturing index dropped to 49.4 in July. Australian consumer inflation expectation dropped to 2.4% in August. UK retail sales will be a focus in European session. Sterling has been relatively resilient this week as supported by stronger than expected CPI. We'll see if today's data would give it some boost against euro. In US session, initial jobless claims, new residential construction, Philly Fed survey will be featured with Canadian international securities transactions and manufacturing shipments.