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JPY: Why The Yen's At A Crossroads



  • Bearish flattening of the US Treasury curve helping USD/JPY.
  • Trade war escalation extends into the US Treasury market?
  • Volatility looks too low.

By Chris Turner, Global Head of Strategy and Head of EMEA and LATAM Research

We see two potentially large and opposing drivers of USD/JPY over the next six months. Further Fed tightening and US Treasury curve flattening look positive. A substantial escalation in the trade war looks negative; volatility looks to be too low

Bearish flattening of the US Treasury curve helping USD/JPY

Despite all the concerns of an escalating trade war, the world's favourite safe haven currency - the Japanese Yen (JPY) - is drifting towards its lowest levels of the year against the US dollar (USD). The rise in USD/JPY over 111 probably owes to firm US yields at a time when US equities are remaining bid. Here the US$1.5trn in US tax cuts have likely delivered insulation for US equity markets.

Typically a flattening in the US Treasury curve has proved bullish for USD/JPY. Here, the typically held view is that the relative rise in short-end US rates relative to the long end makes dollar hedging costs disproportionately expensive. Japanese investors, therefore, reduce their rolling three-month dollar hedges, leading to dollar demand. For reference, it currently costs Japanese investors 2.6% annualised to hedge their USD exposure back into the JPY using three month forward contracts. That nearly wipes out all of the yield pick-ups of investing in US Treasuries. Assuming US equities do not crash this summer, the current bias is for US yields to push higher this summer as US price pressures stay firm and the balance of risks favour USD/JPY towards 114/115 at this stage.

Flatter US Treasury curve usually helps USD/JPY

Source: Bloomberg, ING

Trade war escalation extends into the US Treasury market?

However, those positioning for higher USD/JPY will have to be nimble. As our Chinese economist Iris Pang highlights today, China could

This article was written by

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