Year to date, we have seen a high correlation between the Japanese Yen and the yield on the 10 Year US Treasury. The primary trend has been Yen strength with US 10 year yields moving lower. However, from July 17th to July 31st the Japanese Yen broke its strengthening trend, weakening from ¥101.18/USD to ¥102.80/USD. Meanwhile, the US 10 year yield increased from 2.44% to 2.56%. Treasury yields have since dropped, creating a divergence in the tracking of these two assets. If the relationship seen during the first seven months of 2014 holds, the Yen could strengthen towards 101.50/USD or the US 10 year yield could rise towards 2.70%.
Watch this chart for insights into the risk appetite of global investors. The Yen is a primary borrowing currency for international carry trades, and if the Yen were to strengthen (moving lower towards 101) it could suggest unwinding carry trades, increasing risk aversion, and higher financial market stress. Furthermore, persistent Yen strength would signal a lack of traction for “Abenomics” and the Bank of Japan’s accommodative monetary policy.
Conversely, if the Yen stays weak and 10 Year US Treasury Yields moves rapidly towards 2.70% it could suggest better than expected U.S. employment and inflation data. A development like this could be a sign of a better market environment for U.S. risk assets, but may simultaneously put selling pressure on more “fragile” emerging market currencies, equities, and debt.
Perhaps the optimal scenario for global risk assets would be to see this Yen/USD relationship weaken or deteriorate. If the Yen continues to weaken while only seeing a modest/gradual increase in US interest rates, it should benefit global equities and risk assets.
disclosure: The opinions expressed in this Weekly Chart Book report are those of the author. The materials and commentary are strictly informational and should be used for research use only. This bulletin is not intended to provide investing or other advice or guidance with respect to the matters addressed in the bulletin. All relevant facts, including individual circumstances, need to be considered by the reader to arrive at investment conclusions that comply with matters addressed in this bulletin. Charts and information used in this report are sourced from Bloomberg