Japanese Yen Flatlines Despite US Dollar Weakness. Will Treasury Yields Lift USD/JPY?

The Japanese Yen has been steady so far this week in a period where the US Dollar has broadly weakened against most G-10 peers.

The lack of strength in the Yen might be reflecting the perception that the incoming Governor of the Bank of Japan (BoJ) Kazuo Ueda will maintain the ultra-loose monetary policy stance of his predecessor.

The BoJ has a policy rate of -0.10% and is maintaining yield curve control (YCC) by targeting a band of +/- 0.50% around zero for Japanese Government Bonds (JGBs) out to 10 years.

The 10-year JGB is consistently bumping up against the upper bound of 0.50% as the market continually tests the resolve of the bank in the face of rising yields globally.

There is speculation that YCC might be adjusted in the second or third quarter this year, having been loosened in December.

While the BoJ maintains its dovish stance, the Federal Reserve continues to roll out the hawkish message. Overnight it was Atlanta Fed President Raphael Bostic and Minneapolis Fed President Neel Kashkari waving the rate rise flag.

The latter said that he is ‘open-minded’ about a 25 or 50 basis point lift in the Fed funds target rate at the next Federal Open Market Committee (FOMC) meeting in 3 weeks. Both reiterated the need to get inflation under control.

US Treasury yields are marching north again with the 10-year mote eclipsing 4% again overnight while the 2-year bond made a fresh 15-year peak above 4.90%. If the greenback picks up steam again, a bullish USD/JPY trajectory could unfold further.

An interesting evolution in this run-up in US yields has been the relatively benign reaction in volatility. The MOVE index measures Treasury bond market volatility in a similar way that the VIX index measures volatility on the S&P 500.

The last time US yields were up at these levels, the MOVE index was also at a higher level than where it is currently.

This might imply that the market is more comfortable with this increase in interest rates this time around than previously, potentially allowing rates to stay elevated or possibly go higher still.

If the correlation between USD/JPY and Treasury yields holds, USD/JPY could be underpinned for now.

USD/JPY, MOVE INDEX, US 2- and 10-YEAR TREASURY YIELDS

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