Since the beginning of the month, the Japanese yen seems to be the weakest among the world's major currencies. The JPY is losing against the euro, the pound or even the US dollar, which has been characterized by relative weakness in recent days. Factors related to the global transfer of funds from Japan to other countries may be behind the yen's weakening.
The yield on Japanese 10-year bonds is still under the level of 0.1 percent, thanks to the yield curve control program conducted by the Bank of Japan. Currently, the interest rate on these bonds is 0.07 percent. Meanwhile, in the United States, a systematic increase in yields continues, with 10-year bonds reaching 1.23 percent, the highest level since February 2020. Thus, the increasing difference between the interest rates on U.S. and Japanese debt securities may cause a real flow of capital from Japanese institutions towards U.S. bonds. To buy them, first we must exchange yen for dollars in the foreign exchange market, which may be fueling the recent rise in the USD/JPY exchange rate.
Rising bond yields are not only the domain of the United States, but also of other countries without yield curve controls, such as Australia. There, the 10-year bond yield has risen to 1.31 percent and is the highest since January 2020. Meanwhile, the AUD/JPY exchange rate is at its highest level since December 2018. Moreover, today Bank of Japan governor Haruhiko Kuroda confirmed that the institution he leads will not change monetary policy parameters, including yield curve control.
It remains an open question as to whether other central banks will condone government debt rates rising so rapidly when they are issuing it on a massive scale to prop up the economy in a pandemic crisis. In the United States, interest rates on 30-year bonds, on which mortgage payments are calculated, for example, are rising very sharply, which may hit consumers in the pockets. It is therefore possible that in the spring some central banks could keep a close eye on the debt market, because despite the ongoing asset purchase programs, the supply of debt securities is so large that it may push down prices but raise interest rates.
It also seems that the dynamic rise in yields is not helping the gold market. This one seems to be pretty highly correlated with the price of US bonds. In other words, the lower the bond price, the higher the interest rate and possibly less attractive gold is to investors. So it seems that only the Fed reacting to a rapid decline in prices at the long end of the curve could support gold buyers. Otherwise, prices could still be under pressure.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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