USD/JPY intermarket: Declining rate spreads have supported the JPY

USD/JPY has been heavily on the offer due to the Fed's fund contract dropping to the lowest point since 13th May from 153.03 down to 150.18. 

USD/JPY not only correlates to the Fed's fund contract, but is widely considered a safe haven major cross where the Yen strengthens in a risk-off environment and/or market uncertainty due to the Yen's funding of the carry status. We have seen multiple examples of this over the last decade of trade in the financial crises, especially in the summer of 2015 when USD/JPY highs were met at 125.69  and the VIX took off from 14 and made a high of 24.43 in the same month as investors ran for cover in a very volatile market, while otherwise,  the US dollar, as the world reserve currency, has ultimately benefited in a similar eminence as a safe haven over the course of the financial crisis..

Declining real interest rate spreads have supported the JPY

However, this then leads us to the divergence between Central Bank policies that have wide dissemblance. The Fed tapered their QE programe leading to more positive yields back in 2012 at when the 10Y were at 1.62 rallying to 2.79 in the summer of 2013 when USD/JPY surged from the 78 handle to 105.50 by the end of 2013. 

Has Fed missed its chance? - ANZ

However, in recent times, the declining spreads have been supporting the Yen and now the question here is whether that spread between JGB's and US T-Bills (currently +185 10Y spread) can get much more positive in favour of the dollar should the Fed be unable to continue normalising rates, potentially having missed what little opportunity there may have been to hike in 2016 ahead of the elections in an economy that is not on course to warrant additional monetary tightening at the moment. So, as the attraction of US denominated assets dwindle in light of a receding economy and as medium term yield spreads turn less positive (god-forbid should the Fed turn back to zero of even negative ), the dollar would come under immense pressure again and the Yen could come into further demand on both the funding and investor risk aversion capacity.