JPY: Why the yen’s at a crossroads

12.07.2018 / 10:34

Rating:

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).

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. 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.

Trade war escalation extends into the US Treasury market?

However, those positioning for higher USD/JPY will have to be nimble. China could start considering alternative routes to retaliate against US. One of these qualitative threats from Chinese authorities is that of diversifying away from its large (US$1 trillion+) worth of US Treasury holdings (probably towards European debt markets). Clearly, it would take much provocation for the Chinese to undertake this act of economic self-harm – since the result would be to devalue both the asset and the currency which comprise the largest share of its foreign exchange reserves. Any early signs of the Chinese losing interest in US Treasuries could emerge from their participation at US Treasury auctions. Typically foreign central banks hold US Treasuries with a maturity of five years or less. Were the indirect bid (a key metric of foreign participation at US Treasury auctions) to fall dramatically at the next five-year auction (July 25th), the market could take fright.

Source:CNBC

Read more:

RECCOMEND WAS THIS POST USEFUL FOR YOU?
If you think, we can improve that section,
please comment. Your oppinion is imortant for us.

WARNING: Any news, opinions, research, data or other information contained within this website is provided as general market commentary and does not constitute investment or trading advice. Varchev Finance Ltd. expressly disclaims any liability for any lost principal or profits which may arise directly or indirectly from the use of or reliance on such information. Varchev Finance Ltd. may provide information, quotes, references and links to or from other sites and blogs and other sources of economic and market information as an educational service to its clients and prospects and does not endorse the opinions or recommendations of the sites, blogs or other sources of information.

Varchev Finance

Varchev Finance Ltd is registered in the FCA (FINANCIAL CONDUCT AUTHORITY) with a passport in the United Kingdom: FCA, United Kingdom - registration number: 494 045, which allows provision of financial services in the United Kingdom.

Varchev Finance Ltd strictly comply with the statutes of the European directive MiFID (Markets in Financial Instruments). targeting increased efficiency, transparency and uniformity of financial instruments.
Varchev Finance Ltd is authorized and regulated by the Financial Supervision Commission - Sofia, Bulgaria: License number RG-03-02-05 / 15.03.2006

The information on this site is not intended for distribution or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

Disclaimer:

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 63,41% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

JPY: Why the yen’s at a crossroads

London

Universal numbers