On the face of it, USD/JPY's rally enjoys strong support from Fed rate hikes, but the underlying picture doesn't bode so well for the dollar.
In fact, nominal 10-year Treasury-JGB spreads have fallen since this year's highs, undermining the greenback's allure, while the drop in real rate differentials has been more dramatic.
The moves suggest that rising U.S. inflation, especially compared to Japanese price growth, combined with Treasury yield curve flattening that has depressed 10-year yields, is weakening the foundations of the USD/JPY uptrend.
Real 2- and 10-year spreads are at 57bp and 65bp compared to February closing levels of 172bp and 212bp.
Market expectations of about four more hikes during this cycle -- after two rate rises already this year -- may mitigate the dollar's weakening yield advantage.
But without clear signs that U.S. rates will rise faster than inflation, USD/JPY's 113.18 July peak will be harder to beat.
Meanwhile, a break and close below the key 55-DMA support, last at 110.67, could squeeze out IMM spec JPY shorts and put in play the 200- and 100-DMAs at 110 and 109.52.