Today’s Market Outlook

Focus on U.S. Treasury yields as markets assess the impact of the Treasury’s long-term bond buyback expansion

■ Market Overview

The foreign exchange market is showing a slight bias toward U.S. dollar selling today, with traders closely watching movements in U.S. Treasury yields.

In yesterday’s overseas session, the U.S. Treasury announced around 9:30 p.m. Japan time that it would double the size of its long-term Treasury buyback operations.

Following the announcement, the U.S. 10-year Treasury yield fell sharply to around 4.63%.

USD/JPY also dropped to around 158.17 and weakened further to approximately 158.03 early this morning.

However, the pair failed to break clearly below the 158.00 level. During the Tokyo session, demand for foreign currencies linked to the Gotobi day helped USD/JPY recover into the upper 158 range.

At the start of the London session, mild dollar selling returned.

USD/JPY
Around 158.40

EUR/USD
Around 1.1680

The main focus today is how U.S. long-term yields respond following yesterday’s Treasury announcement.

■ U.S. Treasury Doubles Long-Term Bond Buybacks

The U.S. Treasury announced plans to increase the size of its long-term Treasury buyback operations to support market liquidity.

Immediately after the announcement, expectations for improved Treasury market demand led to bond buying and a sharp decline in U.S. long-term yields.

U.S. 10-year Treasury yield

Before the announcement
Upper 4.6% range

After the announcement
Around 4.63%

Current level
Mid-4.64% range

For now, yields remain near the lower levels reached after yesterday’s decline.

The key question into the New York session is whether yields fall further or begin to rebound in a corrective move.

■ 158.60 Becomes a Key Level for USD/JPY

USD/JPY rose into the upper 159 range earlier in August, while the 158.60 area had previously acted as support.

However, yesterday’s decline pushed the pair clearly below that level.

As a result,

158.60

is now likely to act as short-term resistance.

If USD/JPY fails to recover above 158.60, another move toward 158.00 could come into focus.

On the other hand, a clear recovery and sustained move above 158.60 could open the way toward the upper 158 range and potentially the 159.00 area.

■ Dollar-Bullish Scenario

If the U.S. 10-year Treasury yield rebounds from the 4.63% area and rises back above 4.65% during the New York session, a corrective move following yesterday’s sharp decline could develop.

Higher U.S. yields could encourage renewed dollar buying.

USD/JPY

158.60 recovery

↓

Upper 158 range

↓

159.00 area

In particular, if European bond yields decline, the initial reaction could be renewed dollar buying against the euro and British pound.

■ Dollar-Bearish Scenario

If Treasury buying continues following the U.S. Treasury’s buyback announcement and the 10-year yield falls below 4.63%, dollar selling could intensify again.

If USD/JPY remains below 158.60 and then clearly breaks

158.00,

downside momentum could accelerate.

If EUR/USD continues rising from the 1.1680 area, this could also signal a broader U.S. dollar selling trend.

■ Middle East Tensions and Oil Prices

Middle East tensions also remain an important risk factor.

NY crude oil futures briefly rose above $87 during yesterday’s overseas session.

They are currently holding around

the low-$86 area.

Expectations are growing that tensions between the United States and Iran over the Strait of Hormuz could remain prolonged.

Persistently high oil prices could keep global inflation concerns elevated.

If crude oil moves back above $87, renewed inflation concerns could provide some support to U.S. yields.

However, today’s market focus is likely to remain more heavily concentrated on U.S. Treasury yields following the Treasury’s announcement than on Middle East developments.

■ Key Events Today

・Hong Kong July employment data

・Hong Kong July Consumer Price Index

・Eurozone June construction output

・Canada July Industrial Product Price Index

・U.S. initial jobless claims

・U.S. August Philadelphia Fed Manufacturing Index

・U.S. July Leading Economic Index

・Comments from San Francisco Fed President Mary Daly

・Comments from St. Louis Fed President Alberto Musalem

・Speech by Dutch central bank Governor Olaf Sleijpen

・U.S. 30-year TIPS auction — $8 billion

・Walmart earnings

■ Key Points for the London and New York Sessions

① Whether the U.S. 10-year Treasury yield breaks below 4.63%

② Whether the U.S. 10-year Treasury yield rebounds toward or above 4.65%

③ Whether USD/JPY can recover above 158.60

④ Whether USD/JPY clearly breaks below 158.00

⑤ Whether EUR/USD extends its rise above the 1.1680 area

⑥ Whether NY crude oil futures retest the $87 level

⑦ How U.S. economic data affects Treasury yields

⑧ Whether comments from Fed officials change expectations for further rate hikes

■ Conclusion

Today’s market will focus on whether the impact of the U.S. Treasury’s decision to expand long-term Treasury buybacks continues.

The U.S. 10-year Treasury yield fell sharply to around 4.63% and remains at relatively low levels.

If yields fall further, dollar selling is likely to continue.

On the other hand, if U.S. yields rebound during the New York session, the dollar could see a corrective recovery.

For USD/JPY, 158.60 is the key short-term dividing line.

Failure to recover above 158.60 could lead to another test below 158.00, while a clear break back above 158.60 could bring the 159.00 area back into focus.

While U.S. economic data, Fed comments, Middle East tensions, and oil prices will also be important, the direction of U.S. long-term Treasury yields is likely to remain the primary driver of the dollar today.