Waiting for that JPY turn

Trying to pick a top in USDJPY has become the new widow maker trade but the conditions for a more extensive JPY rally may be appearing on the horizon. The performance of USDJPY is very much influenced by the ability, or otherwise, of Japanese investors to hedge their purchases of US Treasuries and still outperform JGB yields. Here we look at relative 10-yr yields after adjusting for the cost of a 3m hedge. It is still prohibitive for Japanese investors to buy USTs hedged relative to JGBs, but the cost has now fallen to around 1%. Further Fed rate cuts and BoJ hikes could see this gap close completely before 2026 is out. Patience is still required but JPY buy time is getting closer.