MUFG provides an analysis of the potential for further appreciation of the US dollar and offers insights into the changes in the BoJ's Yield Curve Control (YCC) framework. The bank's examination reveals the following key aspects:

Influence of Yields on USD: The current low volatility environment, coupled with the influence of yields, creates conditions that could support a near-term rise in the US dollar. The 2-year UST bond yield's recent drop has also affected the early demand for the USD.

Rates/FX Chart Dynamics: Analysis of rates/FX charts over the past one to three years shows that movements in 2-year swap spreads are supportive of the US dollar. The EUR and GBP may be over-extended, while USD/JPY has room to grow, although the divergence between rates and FX due to YCC changes might affect this.

BoJ's Changes to YCC: The BoJ's shift in the Yield Curve Control on 28th July could be seen as a step towards abandoning the current framework. The increased flexibility in YCC reflects a move away from the traditional approach, although this is unlikely to be formally announced.

Japanese Wage Data: The latest wage data from Japan complicates the economic landscape, with growth in full-time workers' wages slowing down. This inconsistency with price stability could argue against the BoJ's push to end YCC.

Upside Potential for USD/JPY: If the current calm persists and yields continue to matter, there may be room for further USD advances. However, uncertainties emerging from the YCC framework changes may prevent this.

Key Points:

1. The current market environment may support a near-term USD advance.
2. Analysis of rates/FX charts shows a potential boost for the US dollar.
3. The BoJ's changes to YCC signify a shift away from the existing framework.
4. Japanese wage data challenges the BoJ's potential abandonment of YCC.
5. There's potential for USD/JPY to drift higher, but uncertainties around YCC might hinder this.

Conclusion: MUFG's analysis emphasizes the potential for a near-term appreciation of the US dollar, driven by current market dynamics and the behavior of yields. The recent changes in the BoJ's Yield Curve Control framework and the implications of Japanese wage data add complexity to the monetary policy environment, influencing the USD's trajectory. The relationship between rates and FX will likely play a significant role in shaping currency movements in the coming period.