Talking Points:
• BoJ Deputy Governor Kikuo Iwata said in testimony that rate differentials may be priced for the Yen crosses
• He also stated the central bank is considering plans for a QQE exit internally, but it is not yet time
• Curbs on further stimulus support for the Yen exposes a greater risk should risk trends drain support
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There are two fundamental themes that are still keeping USDJPY and Yen crosses from sinking: general risk appetite and the Bank of Japan's efforts. Both of those pillars however seem to be turning tremulous. We have already seen evidence of an uneven outlook for speculative appetite. While global equity indexes have leveled out, we have seen other benchmarks actually dive. As one of the few hold outs, this overvalued carry outlet certainly presents a considerable risk. In fact, the interest income on these positions has long deviated from the path of exchange rates and made the disparity that much greater. One of the last refuges for bulls to hold to is the BoJ's seemingly limitless appetite to deflate the Yen - whether intentional or coincidental - for feeding trade, growth and inflation. Yet, with that connection now fading in remarks given by BoJ members like Deputy Governor Iwata, a turn may be closer at hand than previously expected. We focus on the Yen in today's Strategy Video.
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