USD/JPY remains closely correlated to US Treasury yields – Lloyds Bank

Since the turn of the year, the Japanese yen has fluctuated in a wide 111 to 119 range against the US dollar and the USD/JPY remains closely correlated to US Treasury yields, which have been volatile in recent weeks explains analyst at Lloyds Bank.

Key Quotes

“Through late February and early March, US yields rallied aggressively in response to upbeat rhetoric from FOMC members. But, following March’s ‘dovish’ hike, which saw the median expectation on the ‘dot plot’ unchanged, yields subsequently retraced. The Federal Reserve appears set to continue on a path of monetary tightening through the remainder of the year. In contrast, the Bank of Japan left its interest rates unchanged at its most recent policy meeting, reiterating its commitment to yield curve control by offering to buy 5-to-10-year government bonds in unlimited amounts.”

“The potential monetary divergence suggests the respective interest rate differential should widen. This, combined with buoyant market sentiment, highlighted by global equity markets rallying to new record highs, risks USD/JPY moving higher. However, our model estimates suggest the yen is undervalued. As such, while there is scope for a moderate reversal in the short term, our medium-term expectation is for the JPY to continue to appreciate, towards 108 by end-2017.”