USD/JPY holds above 134.00, eyes this week’s multi-decade peaks near 134.50 post-hot US CPI

• USD/JPY has pared earlier losses and is eyeing a test of multi-decade highs hit earlier in the week near 134.50.
• Yen strength after a joint Japanese government/BoJ statement of concern about currency weakness was short-lived.
• As US yields rise in wake of hotter-than-expected US CPI, USD/JPY remains at risk of further upside.

The yen’s earlier strength that at one point saw the currency recoup as much as 0.7% on the day versus the US dollar after Japan’s government and central bank issued a rare joint statement expressing concern about recent yen weakness has proven short-lived. USD/JPY is back to close to flat on the day and trading comfortably above the 134.00 level, not many pips below the multi-decade highs it reached near-134.50 earlier in the week.

Hotter than expected US Consumer Price Inflation data that saw the headline YoY inflation rate hit a new four-decade high in May and a smaller than expected decline in the YoY rate of core price pressures has resulted in the market rebuilding some Fed tightening bets, pushing US yields higher. USD/JPY, especially in wake of recent commentary from the BoJ, who are doubling down on their dovish policy of negative interest rates and yield curve control, is sensitive to higher a widening of US/Japan rate differentials.

Even though Japan’s top currency diplomat Masato Kanda on Friday told the Japanese press that the government will take action as needed to avoid disorderly currency market moves, a hint towards outright FX intervention (i.e. JPY buying), USD/JPY remains at risk of hitting fresh multi-decade highs before the week is out. The main focus next week will be on the Fed’s policy announcement on Wednesday.