USD/JPY took another leg lower after US payrolls disappointed while renewed geopolitical concerns is another trigger for safe-haven proxy Japanese Yeb (JPY), OCBC FX strategists Frances Cheung and Christopher Wong note.  

USD/JPY set to be a case of sell-on-rallies

“Broader direction of travel for USDJPY has now changed as Fed-BoJ policies shift from divergence to convergence. We also noted how the recent decline in USD/JPY saw a recoupling of the FX to UST-JGB yield differentials. Back during May – Jul, USD/JPY had earlier traded much higher while UST yields and UST-JGB yield differentials went the other way lower.”

“And if we do expect USD/JPY to play catchup to its historical correlation with UST-JGB yield differentials, then there is room for USD/JPY to trade lower. Based on where 2y yield differentials is, our simple univariate fair value model estimates put USDJPY theoretical value at closer to 136. The large misalignment merely suggests that is room for USD/JPY to head lower over time. Pair was last at 145.15 levels.”