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MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
JPY
Much uncertainty rests on tomorrow's BoJ meeting. As this MNI piece highlighted, it is likely the BoJ is considering a number of options (see this link for more details). For USD/JPY, market reaction in the rates space is likely to be watched closely. At the moment, USD/JPY correlations with swap spreads are slightly higher than equivalent spreads in the government bond yield space, particularly at longer tenors.
- This is perhaps not too surprising, given the 10yr JGB yield is being capped by BoJ actions. At present the US-JP 10yr swap spread correlation with USD/JPY sits at 66% for the past month. The first chart below plots USD/JPY versus this spread. The equivalent correlation with the 10yr government bond yield spread is slightly lower at 54%.
Fig 1: USD/JPY & US-JP 10yr Swap Rate Differential
Source: MNI - Market News/Bloomberg
- At the 5yr tenor, the correlation with swap spreads is the same, at 66%, but slightly lower in the government bond yield space at 53%. At the 2yr tenor, correlations dip below 50% for the past month for both swaps and bond yield spreads.
- Not surprisingly, USD/JPY moves have been increasingly correlated with JP 10yr swap moves over the past month, relative to US 10yr swap rates, see the second chart below. Higher 10yr swap rates in Japan are weighing noticeably on USD/JPY, while the correlation with US swap rates in close to flat.
- Given Japan 10yr swap rates are above 1.00%, more than double the BoJ's yield cap on 10yr JGBs, it is evident the swap space is already pricing further shifts from BoJ.
- Current swap spread differentials are still pointing to USD/JPY downside, as the chart above suggests. A dovish pushback from the BoJ tomorrow may induce a spike higher in USD/JPY, but it is likely the market will use this an opportunity to reload on shorts.
Fig 2: Japan Swap Rates A Bigger Driver Of JPY Shifts At The Moment
Source: MNI - Market News/Bloomberg
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
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