Synopsis:

Westpac expresses surprise at the resilience of USD/JPY, maintaining levels well above 150, amidst a significant decline in the US Dollar Index (DXY) to three-month lows. This strength is observed against the backdrop of an evolving rate environment and market expectations for the US Dollar.

Key Insights:

1. DXY Decline Sets USD Tone: The recent drop in DXY suggests a weakening trend for the US Dollar into year-end.

2. Fed Rate Moves and Market Pricing: Current market pricing does not anticipate Fed rate changes in the immediate future, with 100 basis points of cuts expected next year. This situation presents challenges for USD rate support.

3. Fed's Stance on Rate Cuts: Fed Chair Powell and San Francisco Fed President Mary Daly have indicated a reluctance to consider rate cuts, emphasizing the importance of maintaining credibility and avoiding disruptive policy shifts. This stance may lend some support to USD/JPY.

4. Japanese Demand for US Treasuries: Increased interest from Japanese investors in US Treasuries, especially during recent yield increases, could be contributing to USD/JPY's strength.

5. USD/JPY Technical Outlook: Despite broader USD weakness, USD/JPY has stayed robustly above the 150 mark. As long as it remains above 150.50, the technical uptrend is intact. However, the more the DXY weakens, the higher the risk of USD/JPY falling below 150.

Conclusion:

The current market dynamics highlight a complex interplay between Fed rate expectations, investor behavior, and technical trends. While the broader USD environment seems bearish, specific factors, including Fed communication and Japanese investment flows, are supporting the strength in USD/JPY. Investors should closely watch for any shifts in these dynamics, particularly in response to further movements in the DXY and upcoming Fed communications.