3 Jun 2013
Flash: ECB, BoJ amplify efforts given higher US yields – UBS
According to Research Analyst Gareth Berry at UBS, “The recent environment of higher US yields should even help amplify easing efforts by the ECB and BoJ via wider policy differentials through rate cuts and/or balance sheet measures.”
For both the USD/JPY and EUR/JPY, 10-year yield differentials still have the strongest correlations with currency performance (rolling 4-week correlations of daily returns), with the EUR/USD enjoying a particular 'beta' surge of late.
However, monetary policy is directly transmitted through short-term interest rates, and there will be greater 'value' in policy changes for currencies if this part of the term structure becomes more sensitive. “This is also 'working' for the EUR/USD, but not USD/JPY: the pair is becoming less responsive to wider short-differentials, and it's worth noting rate spreads did widen in May (mostly US-led) despite the volatility witnessed.” Berry adds.
For both the USD/JPY and EUR/JPY, 10-year yield differentials still have the strongest correlations with currency performance (rolling 4-week correlations of daily returns), with the EUR/USD enjoying a particular 'beta' surge of late.
However, monetary policy is directly transmitted through short-term interest rates, and there will be greater 'value' in policy changes for currencies if this part of the term structure becomes more sensitive. “This is also 'working' for the EUR/USD, but not USD/JPY: the pair is becoming less responsive to wider short-differentials, and it's worth noting rate spreads did widen in May (mostly US-led) despite the volatility witnessed.” Berry adds.