Rising Japanese demand for Treasuries should fuel a USD/JPY rise above 115.00 after this week's break through key resistance. MOF flow data show net Japanese buying of foreign bonds has surged by nearly JPY5tln since mid August, 3.83tln of that in the last two weeks.
Demand for Treasuries has increased into month-end on Italian fiscal concerns, keeping Treasury yields soggy after 10 and 30-year yields peaked by major historical resistance ahead of the FOMC rate hike Wednesday.
This has allowed USD/JPY to rise without a commensurate widening of Treasury-JGB spreads. USD/JPY gains may, therefore, fizzle eventually if the market sees the lag in spreads being driven more by concerns about the U.S. economy slowing from Q2's robust 4.2 percent growth pace amid Fed tightening, trade measures and the global cost of a stronger dollar.
For now, USD/JPY looks likely to close the quarter above 61.8 percent of the 2016-18 drop at 113.27 with enough momentum to eventually hit the 76.4 percent Fibo at 115.33 that is straddled by the 161.8 percent target off the August base and the March 2017 high at 115.15/51.