Breaking News

Japan's Yen And U.S. Yields

By Marc ChandlerForexDec 05, 2016 11:42AM ET
Japan's Yen And U.S. Yields
By Marc Chandler   |  Dec 05, 2016 11:42AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items

Since the US election nearly a month ago, the Japanese yen has been the weakest-performing major currency. It has fallen 7.5% against the US dollar.

At the risk of oversimplifying, there is one major drag on the yen -- rising US interest rates. Consider that the correlation between the US 10-year generic yield and the dollar-yen exchange rate. The correlation between the level of US rates and the exchange rate is near 0.98 over the past 60 days. It appears to be the highest since at least 1990.

When we run the correlation on the basis of the percentage change, the correlation drops to almost 0.60. This is still the upper end of where the correlation has been over the past decade. In the last five years, it has been above 0.70 only a couple of times.

The correlation between the yen and US yields seems tighter than between the yen and the interest rate differential. The correlation between the percent change of differential between US and Japanese 10-year interest rates and the dollar-yen exchange rate is around 0.57, near the lowest level in four months. The correlation on the level of the yen and the rate differential is at 0.97, which is the upper end of the multi-years range.

How to reconcile these correlation studies? The interest-rate differential is important, but most recently the spread is driven by the US side of the equation. Specifically, over the past month, the US 10-year yield has risen 66 bp while the Japanese 10-year yield has risen almost 10 bp.

Despite the rise in the US (and European and Australian yields) compared with Japan over the past month, Japanese investors have not been significant buyers of foreign bonds. Drawing from the weekly MOF data, we find that the four-week average in November was JPY231 bln. The four-week average in October was JPY313 bln. The average of the last four weeks in September was JPY327 bln. In August, it was JPY688 and in July, Japan bought an average of JPY1.3 trillion a week in foreign bonds.

Foreign investors have returned to Japanese equities. In the year through November 25, foreign investors have sold an average of JPY129 bln of Japanese equities. However, over the past four weeks, foreigners have bought an average of JPY308 bln. This is the highest four-week average in seven months. To be sure, buying Japanese shares does not mean taking on yen exposure. The interest-rate differentials (forward) and the cross-currency basis swap provide powerful incentives to hedge the long yen exposure back into dollars. Over the past month, the Nikkei is off 1.4%, but if hedged back into the dollar, the return is 8% plus the credit for the hedge.

With the benefit of hindsight, we can see how the dollar carved out a low around JPY100. That took three to four months to accomplish. Recall that the greenback peaked at almost JPY126 in early June 2015. The rally has brought the dollar back to almost JPY115. The JPY115.60 area corresponds to the 61.8% retracement of the large down move.

Technical indicators are beginning to flash a yellow light, suggesting caution is in order. Perhaps a tell was that for the first time in a year, speculators in the futures market as of last Tuesday were net short yen. The RSI and Slow Stochastics did not confirm last week's dollar highs. The bearish divergence may make momentum traders a bit cautious. Similarly, although US 10-year yields are firm today, the technical indicators warn of consolidation or correction. The RSI and Slow Stochastics did not confirm last week's yield high and the MACDs appear poised to turn lower. Last week, the 10-year yield approached 2.50%. The kind of correction we anticipate would push the yield a little below 2.30%.

Original Post

Japan's Yen And U.S. Yields
Japan's Yen And U.S. Yields

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Are you sure you want to delete this chart?
Write your thoughts here
Replace the attached chart with a new chart ?
Post also to:
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Dalmas Ngetich
Dalmas Ngetich Dec 05, 2016 6:44PM GMT
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Time to buy some Yen
0 0
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Post 1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email