With USD/JPY rally having thwarted just ahead of 111.50 on Tuesday, the pair has experienced an abrupt reversal ever since, selling-off initially towards the 111.5 handle by last NY close, only to resume its bearish momentum following PM Abe's official announcement that Japan will delay a planned sales tax for an additional 30 months, resulting in what appears to have been a classic 'buy the rumor sell the fact' move in both the Nikkei 225 and consequently USD/JPY.

USD/JPY selling occurs in isolation, intrinsics not quite justifying the move

Since the open of markets in the US last Tuesday, following a long weekend, the Fed fund rate contract has held steady near its trend highs (despite disappointing US data - Chicago PMI, cons confidence -), as the market continues to price in a more hawkish Fed. Meanwhile, the spread between the 10-year US-JP yield has seen a very small narrowing to currently stand at 1.947%, although nothing of major significance. At the same time, we have witnessed a spike higher in the VX (fear barometer) since today's Yen buying, after being capped at fairly low levels.

By analysing the most recent action in USD/JPY vs its intrinsic valuations, we observe that the most recent move lower looks dubious if one takes into consideraion that the Fed fund rate futures contract remains at very elevated levels, and even if the VIX has upticked, in the grand scheme of things, the move is miniscule compared to the levels it was at its peak on April 19th, time when USD/JPY was being paid circa 110.00. As per the yield spread, such an aggressive selling today is not being translated in any significant reduction in the spread.

To sum up, the most recent selling in USD/JPY is not being supported by a reduction in Fed fund rate futures nor yield spread (considering the small reductiion) for now; even the VX uptick this morning does not seem to justify the magniude of the bearish move seen in USD/JPY, suggesting that the dip is not carrying that much substance behind, if judging where intrinsic valuations stand, which have been assessed after a re-anchoring from the most recent balance area below 111.50.