The yen has continued to weaken since last week’s surprise move from the BoJ, but it’s not simply as a result of the BoJ’s decision to further expand its bond-buying program. The best explanatory factor behind the move in USD/JPY we’ve seen over the past week is the divergence between their respective 2Y swap rates. While yen rates have fallen, US rates have risen, even though the Fed further pledged to keep rates on hold at its latest meeting. As such, the US 2Y swap has added 9bp so far this month, a pretty notable move in a near-zero rate environment. Furthermore, the yen equivalent has shed a more modest 2bp.
This is notable given that USD/JPY’s sensitivity to short-term rate spreads is at the highest level for nine months, using the 1mth rolling correlation between USD/JPY and the spread on 2Y swap rates. Thus the premium of US 2Y rates over Japan is now at the highest level for six months. Of course, there are wider issues for the yen, such as dwindling current account surpluses together with the ever-present impact of the lower domestic savings that this brings. Many have been hurt by taking a bearish stance on the yen in an environment of global risk-aversion in recent years. This is likely to remain a risk, given the continued high level of uncertainty around events in Europe, but near-term it is dollar rates that are proving to be the dominant force in pushing the yen lower.
