USD/JPY to hit new highs fueled by rising long-term US yields – MUFG

USD/JPY has lifted above the 110.00 level for the first time since last March when the COVID-19 crisis first started to significantly impact financial markets. The continued march higher for USD/JPY has been supported by the ongoing rise in long-term US yields ahead of Biden’s long-term infrastructure spending plans, as reported by MUFG Bank.

See: USD/JPY to race higher towards the 110.30/38 region – Commerzbank

Key quotes

“The 30-day correlation between daily % changes in USD/JPY and the 10-year UST yield has risen over the past month to +0.41 from around +0.20 at the end of February. In contrast, there has been little correlation between USD/JPY performance and the S&P 500 (-0.03). Upward pressure on long-term US yields is expected to be supported by another fiscal stimulus policy announcement from the Biden administration in the week ahead.”

“President Biden will outline how he would pay for his $3 trillion to $4 trillion plan to tackle America's infrastructure needs on Wednesday, a proposal likely to include tax increases first laid out on the campaign trail. According to the Washington Post, the two-pronged package that President Biden will begin unveiling includes higher amounts of federal spending but also significantly more in new tax revenue with possibly as much as $4 trillion in new spending and more than $3 trillion in tax increases.”

“It differs from the recent $1.9 trillion COVID fiscal package in two main ways. Firstly, the spending will be spread over a longer period, and secondly, it will not all be financed through issuing more debt. According to the Washington Post, officials are worried that the large gap between spending and revenue would widen the deficit by such a large degree that it could risk triggering a spike in interest rates, which could in turn cause federal debt payments to skyrocket.”