CURRENCY WATCH
FX
rising from lows in the USD/JPY 118 area to highs in the 108 area. In this case, the recovery mostly reflects developments on the US front, which overshadowed domestic factors. Te exchange rate mostly tracked the trend of US yields, on the long end of the curve in particular, which decreased, replicating the flattening of the US curve (Fig. A): the short end tracked the Fed’s hikes, whereas on the long end the slowdown in US inflation prevailed.
Fig. A – Te trend of the yen is tracking US (long) yields, replicating the flattening of the Treasuries curve
The underlying trend of the yen, however, should turn downwards again, placing the exchange rate back on a path towards USD/JPY 118 (highs since the beginning of the year) on a 12m horizon. Given the prospect of another four fed funds rate hikes between now and the end of 2018 (as currently projected by the FOMC), US yields will have to resume rising on the long end of the curve as well, resulting in an essentially equal widening of
differentials, as the BoJ has Fig. B – Last year’s anomaly has reversed: speculative market short yen again
US yields will have to resume rising on the long end of the curve as well, resulting in an essentially equal widening of differentials, as the BoJ has confirmed that it will press on – at length – with QQE and its curve control strategy, keeping the short-
term policy rate at -0.10% and the targeted 10Y yield at around zero.
Te yen strengthened against the dollar in the first half of 2017, reabsorbing around half of its post- Trump election correction, and
confirmed that it will press on – at length – with QQE and its curve control strategy, keeping the short- term policy rate at -0.10% and the targeted 10Y yield at around zero.
Te underlying trend of the yen should be a weakening, against the euro as well, with a return of the exchange rate above the EUR/ JPY 130 mark in the course of next year, given the parallel expected strengthening of the EUR/USD.
FX TRADER MAGAZINE July - September 2017 47
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