USD/JPY skids below 132.50 as BoJ confirms stealth intervention

• USD/JPY has slipped below 132.50 as risk-on mood attempts recovery amid easing US-China tensions.
• Anticipation for further continuation of interest rate hikes by the Fed after mammoth labor additions has soared.
• BoJ’s aggressive market operations have drastically limited the scope for speculation in bond futures.

The USD/JPY pair has slipped below the immediate cushion of 132.50 in the Asian session. The asset is sensing selling interest after a two-day positive move amid a rebound in the risk-on market mood. Positive commentary from US President Joe Biden on US-China relations has improved the risk appetite of the market participants.

US President Joe Biden cited on Monday at the White House “The balloon incident does not weaken US-China relations.” This has infused some optimism in the overall negative market impulse. Risk-perceived assets like S&P500 futures are showing some strength after a two-day sell-off in early Asia. However, the return generated by the 10-year US Treasury bonds is still higher at 3.64%.

The US Dollar Index (DXY) settled Monday on a promising note and is expected to remain bullish ahead of the speech from Federal Reserve (Fed) chair Jerome Powell, which is scheduled for Tuesday. The speech from Fed’s Powell will provide cues about the likely monetary policy action in March. The street is expecting a further continuation of interest rate hikes by the Fed as mammoth fresh additions in the United States in the labor market have triggered the risk of a rebound in US inflation.

The US Consumer Price Index (CPI) is in a downtrend for the past few months. However, tight labor market conditions possess the capability of infusing fresh blood into the inflation projections as a major of households equipped with higher earnings could accelerate consumer spending.

On the Japanese Yen front, stronger-than-expected Japanese Labor Cash Earnings indicate that wage inflation is effectively increasing and could propel the overall inflation ahead. The economic data has increased by 4.8%, higher than the consensus of 0.9% and the former release of 0.5%.

Meanwhile, a report from Reuters claims “the Bank of Japan's (BoJ) aggressive market operations to defend its policy band for yields has not only sapped liquidity in the government bond market but also drastically limited the scope for speculation in bond futures.”

Reuters explained deeply that traders cannot profitably short-sell the nearest three-month futures contract, maturing in March, because the BOJ owns most of the so-called cheapest-to-deliver bonds that the futures contract is pegged to.