There is one thing you can count on right now. If you wake up in the morning and USD/JPY is trading lower than the day before, you will have at least three articles in your inbox trying to explain that the unwinding of the Japanese Yen (JPY) carry trade is continuing. Rising interest rates, you will read, are making it unattractive to continue borrowing in JPY, Commerzbank FX strategist Volkmar Baur notes.

JPY is sensitive to USD weakness

“Supposedly supporting this, you will hear about the comments from BoJ Council members, who are currently relentlessly emphasizing that the BoJ will continue to raise interest rates (should the data come in as the bank expects). The problem with this is that the market does not seem to be very interested in the comments made by BoJ members in recent weeks.”

“The market is still not pricing in the likelihood of a BoJ rate hike in September - and the odds of a rate hike by the end of the year are priced at less than 20%. USD/JPY's movements are therefore more likely to be explained by the renewed rise in expectations of Fed rate cuts. Indeed, the exchange rate continues to move in line with the difference in expected year-end Fed funds rates.”

“And since expectations for the BoJ have not changed significantly, the move is logically coming from expectations for the Fed. This is therefore less of a JPY story and more of a USD weakness story. Even though cthan other currencies”.