Foreign Exchange Commentary

Summary

• Canadian dollar eases in month-end flows ahead of holiday.
• The widely watched 10-year U.S. Treasury yield stabilizes around 4.22%.
• Euro currency remains near lower end of first quarter range as dollar shows strength.
• The Bank of Japan ends an eight-year stretch of negative interest rates.
• JPY gains, at times, overnight after official’s stress they are ready to act (intervene).
• Japan’s Kanda says he is seeing clear speculative moves in FX markets.
• Australian yields slip as CPI misses estimates.
• Mexico peso rises, reaches strongest level since 2015.
• U.K. pound supported by British business optimism, gilts steady.
• Policy guidance will test euro-pound resilience.
• Swedish krona extends drop, Riksbank keeps door open for May interest rate cut.
• Xi says China, U.S. should help each other to develop.

Noteworthy

•  Japanese Yen Hits 34-Year Low as Hopes for BoJ Rate Increase Fades

The Japanese yen hit its weakest level against the dollar in 34 years on waning expectations that the Bank of Japan would raise interest rates further after it dropped its negative interest rate policy last week.

The dollar briefly rose to as high as 151.97 yen, which had not been touched since July 1990, compared with 151.55 yen as of Tuesday 5 p.m. Eastern Time. The U.S. currency was recently at 151.77 yen.

The yen was partly undermined by comments from board member Naoki Tamura on Wednesday that the central bank would cautiously unwind its easy monetary policy as a virtuous cycle of rising wages and prices is expected to continue.

The central bank ended an eight-year stretch of negative interest rates and unwound most of its unorthodox monetary easing policies last week, saying a new era of stable inflation is in sight in Japan.  

Tamura said the bank’s decision last week was its first step toward “normalizing” monetary policy and that the central bank would proceed “slowly and steadily” in making policy changes.

On the other side of the coin, the dollar is being bolstered by a weaker case for interest rate cuts by the U.S. Federal Reserve as brisk U.S. inflation in January and February interrupted a streak of cooler reports in the second half of last year.

The yield gap between U.S. government bonds and Japanese government bonds remains wide, making U.S. dollar denominated assets appear more attractive and encouraging the so-called “carry trade,” when investors borrow cheap yen and sell the funds for dollars to be invested in higher-yielding securities.

The returns could be substantial, considering that the two-year U.S. Treasury yield was recently at 4.593%, while the two-year Japanese government bond yield was 0.191%.

Traders are looking at the psychologically important 152.00 yen level against the dollar, said Alvin Tan, head of Asia forex strategy at RBC Capital Markets. He said that concerns about potential intervention by Japanese authorities “have not seen the (dollar/yen) pair pullback much at all, merely capping it for now.”

Concerns about intervention have been fueled by a warning to speculators from Japan’s Vice Minister of Finance for International Affairs Masato Kanda, analysts said. He said Monday that the yen’s recent weakening was “not in line with (economic) fundamentals,” according to Japanese media reports, and added that there were “clearly speculations” behind the developments. 

BOJ Gov. Kazuo Ueda has said the bank will maintain accommodative financial conditions to support the economy and prices. The central bank’s policy board is scheduled to release a fresh inflation outlook at its April meeting.