Rising Treasury Yields Boost Demand for USD/JPY

U.S. Treasury markets were quite volatile last week as investors continued to react to the U.S. Federal Reserve monetary policy statement from earlier in the month which showed the central bank was likely to raise interest rates at least three times. Last week, Treasury traders also reacted to the passage of the tax reform bill, pricing in how they feel it will effect economic growth next year.

Last week, the 10-year Treasury yield reached a nine-month high of 2.504 percent. The Two-year yield ended the week near its nine-year high at 1.895 percent. The five-year yield touched 2.254 percent, which was the highest since April 2011.

The five-year to 30-year part of the yield curve was over 1 basis point flatter at 58 basis points. It hit 51.9 basis points earlier in the week on Monday which was the flattest since October 2007, Reuters and Tradeweb data showed.

Traders and investors had piled into "curve flattener" bets on expectations the Federal Reserve will raise short-term rates further and long-term inflation would stay tame. On the week, the gap between five-year and 30-year yields grew by nearly 5 basis points, which was the biggest such move since late July.

Of the major Forex pairs, the Dollar/Yen posted the most positive reaction to the news and to the movement in the Treasury yields. Other currencies like the Australian and New Zealand Dollars, which at times are sensitive to the movement in yields due to the interest rate differential between U.S. Government Bonds and Australian and New Zealand Bonds, showed limited reaction to rising U.S. Treasury yields.

Japanese Yen

The USD/JPY settled at 113.252, up 0.667 or +0.59%.

Mixed U.S. economic data may have limited gains. News from the Bank of Japan failed to impress investors. The widening of the spread between U.S. Government Bonds and Japanese Government Bonds made the U.S. Dollar a more attractive investment.

Bank of Japan

The Bank of Japan held its monetary policy steady, as inflation is still far from the targeted 2 percent despite a growing economy.

At the end of its two-day policy meeting, the central bank said it is maintaining its short-term interest rate at minus 0.1 percent and the target for the 10-year government bond yield at zero percent.

"Japan's economy is expanding moderately," the BOJ said in a statement.

Australian Dollar

The AUD/USD settled at .7714, up 0.0075 or +0.98%.

In Australia, the Mid-year Economic and Fiscal Outlook came out in line with market expectations, showing smaller budget deficits for the current and next financial year. According to the outlook, the 2017-18 underlying cash deficit is seen at around AUD23.6 billion, from AUD29.4 billion at budget. The 2018-19 underlying deficit is expected to be AUD20.5 billion from AUD21.4 billion previously.

In addition, the consensus for a surplus in 2020-21 was maintained, albeit with a slightly healthier buffer. Improved balance projections have resulted in marginally lower net debt projections, which are expected to peak at a lower 19.2% of GDP, from a peak 19.8% at budget time in May, the report said.

In other news, the Reserve Bank of Australia's December minutes provided some support for the Aussie Dollar, with the central bank pointing optimistically to strengths within the labor market, asserting that employment growth will continue to be 'somewhat above average' in the next few quarters.

The minutes also suggested that strong employment would eventually feed into higher wages and higher levels of inflation, (albeit at a slower pace). This could, potentially, result in rate hikes in the years ahead, although this remains entirely dependent on the extent that inflation rates rise.

New Zealand Dollar

The NZD/USD finished the week at .7018, up 0.0036 or +0.52%.

In New Zealand, oversold conditions and optimism over the appointment of a new governor at the Reserve Bank of New Zealand continued to provide support.

Additionally, New Zealand posted a bigger-than-expected goods trade deficit in August as exports of milk powder, butter and cheese declined and imports of crude oil and petroleum products jumped higher.

The country had a trade deficit of $1.235 billion in August, little changed from the $1.24 billion deficit in August last year but ahead of the $968 million average monthly deficit in August over the last five years, Statistics New Zealand said. The deficit was bigger than the $825m median forecast in a Bloomberg survey of 10 economists.

In other news, New Zealand quarterly GDP came in at 0.6% as expected, however, this was below the upwardly revised previous estimate of 1.0%.

This article was originally posted on FX Empire