USD/JPY pushes higher towards 115.50 as higher US yields, commodity prices favour buck over yen for now

• USD/JPY moved back towards 115.50 on Monday as US yields and commodity prices rose, favouring the buck over the yen.
• The pair remains well within recent ranges, with both currencies receiving a bid related to Ukraine war uncertainties.
• Aside from geopolitics, US inflation data on Thursday is one key risk event to keep an eye on.

As US yields rise to reflect the inflationary impulse of the recent commodity price rally and as FX markets continue to favour the currencies of countries that are net commodity exporters, the US dollar is ruling the roost. Though JPY is by no means one of the worse performing G10 currencies amid a safe-haven bid triggered by underperformance in global equities, its vulnerability as a net commodity/energy importer in the current environment means USD/JPY is advancing. The pair probed but was not able to break above, the 115.50 level on Monday, and at current levels in the 115.30s is about 0.5% higher on the day. That means most of Friday’s 0.6% drop from near 115.50 to as far as the 114.60s has been erased.

Traders won’t be reading too much into Monday’s intra-day price action for USD/JPY. Unlike other USD majors (like GBP/USD and EUR/USD), USD/JPY did not breach any key levels. Rather, the pair has remained well within the bounds of the 114.50-115.80ish range that has prevailed for the last slightly more than three weeks. Geopolitical developments and the readthrough of the commodities will this week likely remain the main driver in FX markets, suggesting further upside risk to the pair. US Consumer Price Inflation data for February will also be closely scrutinised just in case it comes in much hotter than expected and rebuilds the case for a 50bps Fed rate hike later in the month (not the market’s base case at the moment).

Ahead, as the war in Ukraine rumbles on and the risk that it escalates into a broader European conflict escalates, both USD and JPY are likely to remain in demand versus most G10 pairs. But the backdrop of elevated and potentially still rising commodity prices, plus a Fed that seems (for now) intent on raising rates at least back to neutral, suggests the dollar may be the more attractive safe-haven of the two. Perhaps that means that in the coming weeks, USD/JPY can move back to challenge annual highs in the 116.30s.