FXTM information and reviews
FXTM
93%
OctaFX information and reviews
OctaFX
92%
XM information and reviews
XM
91%
FXCC information and reviews
FXCC
90%
Libertex information and reviews
Libertex
89%
FxPro information and reviews
FxPro
88%

Yen smashed by rising yields


12 October 2021

A powerful recovery in bond yields across the world is inflicting some serious damage on the Japanese yen. The Bank of Japan’s yield curve control strategy essentially keeps a ceiling on Japanese yields, rendering them unable to join the global rally and making the yen less attractive as interest rate differentials widen against it. Global yields have been propelled higher by expectations for stickier cost inflation, with supply chains in disarray and energy prices going berserk. Investors are betting central banks will eventually respond by raising rates to tame inflationary forces. But the BoJ will probably be the last one to do so given Japan’s chronic battle against deflation. The nation’s heavy reliance on energy imports also dims the outlook for growth. 

Nightmare environment for yen

Even the nervousness in equity markets couldn’t stop the bleeding in the yen, which is generally seen as a safe haven. Looking ahead, the outlook remains negative in an environment of monetary policy divergence between Japan and most major economies. Carry trades are coming back into fashion and the yen is the market’s favorite funding currency. 

The saving grace for the Japanese currency would be some massive shock that sparks panic in the markets and pushes investors back into bonds for safety, calming yields down. However, this doesn’t seem likely since most of the risks facing markets are linked to inflation and higher rates. 

Wall Street loses altitude

Stock markets started the week on the wrong foot. From paralyzed supply chains to an energy crisis that threatens to cripple Europe and Asia to growing credit risks in the Chinese property sector, there are several threats on the radar forcing traders to play defense. It’s a perfect storm. Supply chains seem overwhelmed, with disruptions spilling over from ports to the mainland lately amid lorry driver shortages, squeezing corporate profit margins as transportation and energy costs soar simultaneously. This burden could be passed onto consumers, taking a bite out of real incomes. 

The fear is that global growth slows down as companies can’t cover demand but inflation remains hot thanks to cost pressures - a toxic combination that central banks are powerless against. And with the fallout from Evergrande spreading across the Chinese property market as more developers miss debt payments, there is a dimension of credit risk as well.

That said, this isn’t a catastrophe either. Growth is unlikely to slow enough to turn this into another recession and investors remain fairly confident that any credit events in China will remain isolated. Hence, there is light at the end of the stagflation tunnel, although it’s too early to call for the bottom ahead of an earnings season that will likely echo worries around growth and inflation. 

Sterling weighs BoE error, euro struggles 

In the broader FX arena, sterling is trapped in limbo, incapable of capitalizing on mounting bets that the Bank of England will raise rates this year. British inflation expectations have skyrocketed, signaling that this inflation episode will be persistent as the UK is suffering more acute supply disruptions than most economies. 

Markets are saying the BoE will respond by raising rates, but central banks can’t fix broken supply chains, so there is a risk this will be a policy error that simply chokes the recovery. As for the pound, the BoE is already priced very aggressively, so the currency’s fortunes now hang mostly on how risk sentiment fares.  

Meanwhile, euro/dollar remains heavy. The picture still seems negative amid Fed/ECB divergence, safe-haven demand for the dollar, and the American economy escaping a global slowdown with only minor injuries thanks to its self-sufficiency on energy. 

By XM.com
#source

Share:


Related

USD/JPY sticks to its consolidative theme
USD/JPY sticks to its consolidative theme

USD/JPY remains side-lined for the time being, note FX Strategists at UOB Group Lee Sue Ann and Quek Ser Leang. Yesterday, we highlighted that ‘upward momentum has slowed and USD is unlikely...

5 Aug 2022

USD/JPY pares intraday losses to multi-week low
USD/JPY pares intraday losses to multi-week low

USD/JPY stages a goodish bounce from a multi-week low touched earlier this Friday. Recovering US bond yields help revive the USD demand and offers support to the pair...

29 Jul 2022

The Yen updated the lows
The Yen updated the lows

USDJPY reached new highs – the “greenback” continues to get stronger. The Japanese Yen plunged against the USD. The current quote for the instrument is 137.02. A new high for the pair is at 137.28....

11 Jul 2022

The Yen may drop
The Yen may drop

USDJPY is preparing a new attack on the highs. The Japanese Yen is slowly falling against the USD. The current quote for the instrument is 136.16. The statistics published...

8 Jul 2022

200-hour SMA, around 135.60 might continue to cap the upside
200-hour SMA, around 135.60 might continue to cap the upside

USD/JPY recovered a few pips from the daily low, though lacked any follow-through buying. Ascending trend-line breakdown and failure near the 200-hour SMA favours bearish traders...

4 Jul 2022

The Yen hit new lows
The Yen hit new lows

USDJPY updated its 24-year highs and may continue rising. The Japanese Yen hit a new 24-year low against the USD. The current quote for the instrument is 136.25. The high in USDJPY...

22 Jun 2022


HFM information and reviews
HFM
87%
IronFX information and reviews
IronFX
86%
FXCM information and reviews
FXCM
85%
Pepperstone information and reviews
Pepperstone
84%
NordFX information and reviews
NordFX
83%
LegacyFX information and reviews
LegacyFX
82%

© 2006-2022 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.