- USD/JPY has rallied to the 106.00 mark on Tuesday, driven by higher US bond yields.
- Strong US data also helped spur the rally.
USD/JPY shot to the upside on Tuesday, driven primarily by a significant widening of US/Japanese rate differentials. The pair, which started the session in the 105.30s, is now trading around the 106.00 level, its highest level since early October. USD/JPY closed Tuesday FX trade 0.6% or nearly 70 pips higher. Looking ahead, Japanese trade data from January will be released at 23:50GMT, but is unlikely to impact USD/JPY too much, with traders more focused on movements in the US bond market.
Driving the day
The main factor driving USD/JPY higher on Tuesday was a steep sell-off in US government bond markets that saw yields rise sharply. The US 10-year rallied above 1.31%, up more than 11bps on the day. That compares to the Japanese 10-year yield which was hardly moved on the day around 0.07%. That means the US 10-year/Japan 10-year spread widened 11bps to 124bps, further increasing the US rate advantage over Japanese government bonds. Japanese government bond investors are thus likely going to be tempted to sell their Japanese bonds, then use those yen to buy dollars (hence strength in USD/JPY) to then buy now much higher-yielding US debt.
Strong US data also helped USD outperform its Japanese counterpart; the NY Empire State Manufacturing Index survey was stronger than expected, with the headline number jumping to 12.1 in February versus expectations for a much more modest rise to 6.0 from 3.5 in January. The strong survey bodes well for the Philadelphia Fed Manufacturing survey and Markit PMI report set to be released on Thursday and Friday respectively this week. With Covid-19 infection rates in the US dropping sharply and precipitating further reopening, the impact of January stimulus starting to be felt and expectations for further fiscal stimulus ahead, US economic data is set to improve over the coming months.
In terms of fundamental developments in Japan; JPY has been broadly unaffected by reports from Nikkei that the government is unlikely to lift the country’s state of emergency this week. JPY weakness may well have been exacerbated by dovish comments from Bank of Japan Governor Haruhiko Kuroda, who pushed back against the notion that the bank might soon think about tapering its ETF purchase programme. He reiterated that buying ETFs are part of the bank’s monetary easing program and the BoJ will not end nor seek an exit from such purchases for the time being.
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