USD/JPY is consolidating after a sharp 6% drop from 11 July, when soft US CPI data and strategic Japanese FX intervention took its toll, ING’s FX strategist Chris Turner notes.

USD/JPY may have a decent bounce to 157

“Speculative Yen shorts in Chicago futures markets, in the week to 23 July, had scaled back their positions by 40% over the prior two weeks. This community probably cut positions a little further later last week when USD/JPY traded on a 152 handle. It seems fair to assess that the speculative market is a lot better balanced than it was at the start of July.”

“Tomorrow's BoJ/Fed combination will of course have a big say on whether this USD/JPY correction goes much further. ING's house view of a 15bp BoJ hike and a dovish Fed argues that the correction extends, potentially close to 150.”

“However, the low volatility environment and already a large correction across risk assets this month warns that if the BoJ surprises us (not locals) with unchanged policy, USD/JPY could have a decent bounce to 157 and that a cross rate, like AUD/JPY, could have a sizable rally. We'll know a lot more this time tomorrow.”