Market update: USD soars as JPY sinks on burgeoning yield differential

USD/JPY at its highest level since November 2022

The US dollar roared across the board overnight with Treasury yields taking flight along the curve. USD/JPY ran to its highest level since November last year in the New York session, topping out at 148.80.

It recoiled lower in early Wednesday trade after comments from Masato Kanda, Japan’s Vice Minister of Finance for International Affairs, Japan’s “chief of currency”. On speculative moves in foreign exchange, he said: “If these moves continue, the government will deal with them appropriately.”

The framing of the language has been viewed by the market as softer than that used when the Bank of Japan (BoJ) intervened in USD/JPY late last year. Most apparent is that the jawboning has begun and may seem likely to get stronger should USD/JPY approach last year’s peak of 151.95.

JGB yield creeping higher

In the meantime, the spread between Treasuries and Japanese Government Bonds (JGB) has been widening, but not to the same extent that occurred when USD/JPY hit its peak.

While the 10-year Treasury note is close to where it was in November last year, the JGB yield has been allowed to creep higher. It is currently near 0.65%, above the 0.50% yield it had previously been anchored to by the BoJ’s yield curve control (YCC) programme.

The change in YCC policy was not a directive to adjust the +/- 50 basis points band around zero percent for JGBs out to 10 years, but rather to allow flexibility in the implementation. Today’s comments from Kanda san might be reflective of an overall tilt in the way Japanese officials are seeking to avoid sudden and excessive volatility toward Yen depreciation.

BoJ board member Hajime Takata also spoke on Wednesday but did little to move the dial in regards to monetary policy.

Elsewhere, currencies exposed to global growth and risk sentiment saw the largest losses overnight with the Australian dollar leading the way lower in the aftermath of the RBA leaving rates on hold yesterday at 4.10%.

Compounding the outlook for such currencies, the outlook for China continues to be mired in uncertainty around the prospects of the property sector there being able to make a recovery. The Caixin services purchasing managers’ index (PMI) missed forecasts yesterday, coming in at 51.8 for August, rather than the 53.5 anticipated and 54.1 previously. The composite PMI was 51.7 against 51.9 prior.

USD/JPY and yield spread between 10-year Treasuries and JGBs

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