Finally, a weaker yen again - SocGen

Kit Juckes, Research Analyst at Societe Generale, suggests that this year’s sharp USD/JPY fall occurred in tandem with a huge relative move in real bond yields – the spread narrowing by 90bpo between January and September as EUR/USD fell by over 20%.

Key Quotes

“The BOJ’s decision to cut policy rates didn’t drag longer dated nominal yields down and as the FX-related base effects which had boosted inflation expectations went into reverse, real yields rose. It’/s only since the end of the summer , and the switch to targeting 10year nominal yields, that the BOJ has found a more effective policy, aided hugely by the global rise in yields.”

“The story of the first quarter of 2015 was the sharp fall in European real yields which dragged the Euro down. As they recovered, so did the Euro. The start of 2016 saw the spike in JGB yields at the same time as US real yields were falling. Down went USD/JPY. Mid-2016 is notable for the very sharp fall in real yields in the UK after the referendum. And the last two weeks have seen real yields rise in the US, Europe and the UK, but fall in Japan. A recipe for the BOJ, finally, to get the FX market response it wants.”