TOKYO: The yen appears to be at the mercy of American inflation expectations, which means the current selloff is likely to stall unless US rates keep moving higher.

       The ratio between three-month call and put options on the dollar-yen currency pair – a so-called risk-reversal – has been tracking closely a commonly used measure of market expectations for US consumer price gains, the five-year five-year forward rate. And with inflation expectations surging, that dynamic has helped make the Japanese currency the worst performer this month among Group-of-10 peers.

       The yen has weakened more than 2.5% against the greenback so far this month, while most other major developed market counterparts have notched gains. It’s down close to 10% for the whole of 2021.

       Meanwhile, solid economic growth in the United States coupled with supply chain difficulties and a commodities’ shortage has pushed inflation expectations to levels unseen since 2017.

       The upshot is that those expectations of price gains probably need to keep on rising from here for the yen move to maintain momentum.

       More bearishness in the yen “would involve breakevens rising towards 3% and a new selloff in the bond market, which is now on hold,” according to Societe Generale strategists Kit Juckes and Olivier Korber. But with positioning on the currency potentially having peaked, the move in dollar-yen could falter this week, they wrote in a note Tuesday.

       Data from the commodity futures trading commission show that speculative bets against the yen have already increased in the past few weeks. — Bloomberg