Bank of Japan, US Yields and the ¥YEN Crosses

Bank of Japan, US Yields and the ¥YEN Crosses

The Bank of Japan has finally stepped away from some components of its aggressive monetary policy which began in 2013. Since 2016, the BoJ has committed to keep the 10-year bond yields around zero. Here are the important takeaways from the March BoJ meeting.

  • The BoJ will now finally allow the 10-year bond yield to oscillate in a larger range than previously, ±0.25% from the target level.
  • The BoJ will continue to buy equities up to a maximum amount of ¥12tn per year.
  • The overnight interest rates were kept at -0.1percent as the market expected.

The BoJ has brought forward an idea of launching a scheme to pay banks bonus on the reserved balance, in the event the Bank of Japan has to cut the interest rates further into negative territory to generate inflation. However, it is worth noting all the previous efforts by BoJ to spark inflation did not work as expected so far as shown by the chart below.
Source: Financial Times

US-Japan 10Y Yield

US-Japan 10Y Yield (Source:Trading Economics)

US 10Y and USD/JPY Correlation

US 10Y and USD/JPY Correlation (Source: Trading Economics)

USD/JPY Daily

USD/JPY Daily

  • USD/JPY has initiated a series of higher-highs and higher-lows since the exchange rate bottomed in early January 2021.
  • The exchange continues to trade above all major SMA(20,50,100 and 200) with momentum oscillators pushing higher in bullish territory.
  • A bullish golden cross is taking shape as the 50 Daily SMA has crossed the 200 Daily SMA from the bottom.
  • Will be on the lookout for the exchange rate to test the ¥108 area, where the 20 Daily SMA intersects with the ascending channel.

EUR/JPY Daily

EUR/JPY Daily

  • EUR/JPY has been accelerating higher, gaining as much as 15.30% since the exchange rate bottomed around the ¥113.50 handle.
  • Fears of third wave of the virus has sparked a recent selloff in the EURO, which keeps it vulnerable against the safe haven JPY.
  • However, it is worth noting the market broke above the significant resistance area around the ¥127.50 level, which may keep the exchange rate afloat.
  • Broken resistance may offer support as the exchange rate correction tests the ¥128 area.

GBP/JPY Daily

GBP/JPY Daily

  • Sterling has been one of the best performing G7 currencies as the market has been aggressively pricing in Brexit deal, not to mention Sterling benefiting from Risk on Environment.
  • The spread between moving averages highlights the recent momentum the market has been experiencing.
  • Sterling’s outlook remains uncertain as many questions remain unanswered such as, is the deal fully priced in? How will the UK economy perform as the country is no longer an EU member?
  • However, against the YEN the chart does remain strong and hints on further upside, unless momentum dramatically shifts to the downside.

Summary

  • We expect the YEN to continue to depreciate against major G10 currencies, as the BoJ sticks to its negative rates policy.
  • However, the US Dollar remains our favourite BUY against the YEN.
  • Not only is the US economy outperforming, but the US Dollar also offers the safe haven appeal in the event the Global outlook darkens.