- USD/JPY is taking a pause on a corrective phase amid softer US Treasury yields.
- Surging borrowing costs are causing liquidity traps.
- US CPI data will pave the way for the next FOMC meeting.
USD/JPY rebounded after hitting the monthly low of 132.34. The short covering just comes ahead of the US Consumer Price Index (CPI) release. The corrective downfall in USD/JPY was started earlier this week on the back of falling US Treasury bond yields.
The Silicon Valley Bank’s (SVB) fallout has prompted investors to revisit their rate-hiking expectations about the Federal Reserve's (Fed) plans to increase interest rates during the March FOMC meeting., which was surging exponentially prior to the last Nonfarm Payrolls (NFP) release.
When borrowing costs increase, it's natural for highly leveraged businesses to experience pressure in repaying their debts. The recent rise in US Treasury bond yields, which reflects the lending rates in the US economy, has resulted in a decrease in the value of US government bonds purchased during a low-yield market period.
Therefore, the credit side has loosened the original value amid surging yield and a liquidity trap is emerging among the businesses.
Fundamentally, this situation is quite similar to the UK’s bond market incident that happened a while ago, where the pension funds have struggled with liquidity.
Since the Fed commentary is muted for further clarity on the underlying US financial ecosystem, investors are refraining to put fresh bets on risky assets.
Meanwhile, US Consumer Price Index (CPI) is on the cards. The market is expecting a slightly downbeat CPI release from prior releases on Tuesday. As it is always said “devil in the details”, market participants will likely jump to the service-led inflationary portion, since the Fed has made concerns regarding this in many instances.
Levels to watch
USD/JPY
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