The Japanese yen plunged to an almost three-month low against the U.S. dollar on Tuesday. It has also tumbled down to a two-week low versus the Euro. Soaring bond yields in the U.S. and Europe attracted Japanese investors’ attention. Overall, the yen lost almost 0.2% to 111.21 per dollar during the last session, reaching a level not seen since July 2. It decreased by about the same amount to 130.07 to the common currency after earlier hitting 130.115 for the first time since September 14.
A ruling party election will decide Japan’s new prime minister on Wednesday, with frontrunners Fumio Kishida and Taro Kono backing more stimulus to support the coronavirus pandemic recovery. Traders avoid buying the yen while waiting for the news on that front, further weakening the Japanese currency.
Thus far, the Bank of Japan’s yield curve control policy has benchmark 10-year Japanese government bond yields pinned near zero. On the other hand, U.S. Treasury yields have skyrocketed to a three-month high, jumping to 1.516% overnight.
German 10-year bund yields remained below those on JGBs. Still, they have jumped to the highest level since the start of July at minus 0.191% after collapsing as low as minus 0.340% a week ago.
Ray Attrill, the head of FX strategy at National Australia Bank in Sydney, stated that the most significant impact of higher Treasury yields on currencies has been to see the USD/JPY pair’s upward progress. He added that 111 would be a challenging level to overcome, considering that the pair have spent only two days with time above this level thus far this year.
What About the Currency Index?
The dollar index recently rallied as high as 93.526 for the first time in more than a month against six major rivals. However, it has since moved mostly sideways. The index stood at 93.385 at last. A hawkish shift at the Federal Reserve has supported U.S. yields. Last week, the agency announced that it might start tapering stimulus in November, simultaneously hinting that interest rate increases may follow sooner than analysts expected.
Hawkish tones from the Bank of England and Norges Bank reinforced Fed’s statements. Last week, Norges Bank became the first developed-nation central bank to raise interest rates, pushing other global bond yields higher.
The greenback changed slightly at $1.16995 against the Euro. It remained near the more than one-month high of $1.16835 reached on Thursday. According to analysts, there’s a big chance for the dollar to increase over time.
Mazen Issa, the senior FX strategist at TD Securities, noted that even though taper in and of itself is not a surprise, an earlier end to the Fed’s program will reinforce that downside risks to the greenback have diminished. He added that almost half of the dollar’s cyclical upswing was observed three months after the taper. Considering that, the agency may end its quantitative easing program by June 2022.
On Monday, Federal Reserve officials tied reduction in the agency’s monthly bond purchases to continued job growth. As a result, a September employment report is now one of the potential triggers for the central bank’s bond tapering.
Fed Chair Jerome Powell and Treasury Secretary Janet Yellen plan to speak before Congress later on Tuesday. Furthermore, the European Central Bank begins a two-day conference later today. Governor Christine Lagarde is going to give opening remarks among other speakers.
How Did the Australian Dollar and Other Asian Currencies Fare?
The risk-sensitive Australian dollar soared by 0.25% to $0.73065 on Tuesday. Before that, it had gained 0.4% on Monday. This was thanks to the new data showing retail sales dropped less than expected last month during the coronavirus lockdown.
In addition, concerns about contagion from China Evergrande Group’s debt woes receded. That and a recovery in the iron ore prices supported the currencies, even though the commodity declined on Tuesday for the first time in four days.
Westpac strategists noted that they still see concerns about Chinese property developers and steel production curbs as having some way to run. With the U.S. Federal Reserve set to begin tapering in the months ahead, fresh lows below $0.7200 likely await.
The Chinese yuan also strengthened slightly against the greenback on Tuesday. This was despite several investment banks cutting economic growth forecasts for China.
Goldman Sachs lowered its 2021 growth forecast for the country to 7.8% from 8.2%. It announced that deep industrial output cuts and energy shortages added significant downside pressures.
The People’s Bank of China also changed its recent statement about stable and consolidating growth, removing the phrase from the report after its latest quarterly monetary policy committee meeting.
The Chief Asian FX strategist at Mizuho Bank in Hong Kong, Ken Cheung, noted that the bank downgraded its assessment to China’s growth outlook. It seems the PBOC is trying to retain the stable growth of credit expansion and its effectiveness in supporting the economy.