MUFG’s Lloyd Chan notes USD/JPY is trading close to its 2024 highs as resilient US data and elevated US yields underpin Dollar carry appeal. Chan highlights that strong US labour market conditions and sticky Personal Consumption Expenditures (PCE) Price Index inflation keep near-term US rate cuts unlikely, supporting the Dollar even as authorities may consider policy support for the Japanese Yen (JPY) at current levels.

Dollar carry backdrop supports highs

"US PCE inflation for May is likely to remain elevated, although it is also likely approaching a peak as the recent sharp decline in oil prices begins to feed through. That said, the pass-through to US gasoline prices has been slower, suggesting that any moderation in inflation could be slow rather than abrupt. Even if gasoline prices were to normalize back to pre-conflict levels, PCE inflation is likely to remain sticky and above the Fed’s target."

"Near-term US rate cuts remain unlikely."

"At the same time, US labour market conditions continue to hold up, with improving nonfarm payrolls in recent months. This resilience should reinforce the Fed’s patient stance and keep front-end yields elevated. Meanwhile, Fed Chair Kevin Warsh’s decision to step back from the dot plot could keep term premia elevated."

"With the US 2-year yield still above 4% and the 10-year around 4.4%, the rate backdrop continues to support carry demand for the dollar."

"Against this backdrop, USD/JPY is trading near its 2024 highs. However, given the elevated risk of policy support for the yen at current levels, participation in further upside in USD/JPY is perhaps best approached with downside protection."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)