FX Daily: Insights into USD/JPY and US bond yields

USD/JPY consolidates in a 110-115 range
Philip Wee10 Nov 2021
    Photo credit: Unsplash Photo

    The current consolidation in the currency market provides an opportunity to step back and examine how Fed hike expectations have driven the USD against its weakest DXY component, JPY. 

    In 1Q21, USD/JPY rose from 103 to 111 when the US Treasury (UST) 10Y yield surged to 1.70% from 1.00%. Specifically, the steepening of the US curve lifted the USD on increased expectations for strong US growth from US President Joe Biden’s large stimulus bills. Although the Fed first talked about the possibility of tapering asset purchases this year, the UST 2Y yield was flat at 0.15%, within the 0-0.25% Fed Funds Rate target. 

    However, USD/JPY held above 109 when 10Y UST eased back to 1.20% by early August. The UST 2Y yield pushed into a higher 0.20-0.25% range on the Fed’s hawkish tilt at the FOMC meeting on 16 June. US CPI inflation first hit 5% YoY in May and has since stayed firm around 5.4% into September, setting the stage for a hawkish FOMC meeting on 22 September. Apart from signaling the tapering of asset purchases announced at its 3 November meeting, the Fed brought forward its guidance for rate hikes into 2022. 

    USD/JPY rose from 110 to 114 on a spike in the UST 2Y yield from 0.25% to 0.50% into late October. JPY crosses also surged during this month from other G10 central banks (excluding BOJ) acknowledging that inflation was staying higher and longer than they had initially anticipated under their transitory inflation assumption. The party was disrupted after the European Central Bank (on 28 October), the Reserve Bank of Australia (on 2 November) and the Bank of England (on 4 November) pushed back against aggressive rate hike bets their policy meetings. Yesterday, USD/JPY closed at 112.87, below 113 for the first time since 8 October, consistent with lower UST yields of 0.42% and 1.44% for the 2Y and 10Y respectively. 

    In hindsight, it might have been better to track USD/JPY with the UST 5Y yield which is better at balancing between rising rate and inflation worries at the front-end and growth worries at the long end of the yield curve. For now, the market is content with USD/JPY consolidating in a 110-115 range until the Fed affirms its intention to deliver more than the 1-2 rate hikes already priced in. Hence, the rate guidance at the FOMC meeting on 15 December will be more important than today’s expectation for US CPI inflation to rise to 5.9% YoY (consensus) in October from 5.4% in September. 


    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]

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