The discrepancy between the USD/JPY and the US debt market rates suggests sales of treasuries by China

The Japanese yen continues to stump financial markets. The autumn rally of the USD/JPY was accompanied by the yield of 10-year US Treasury bonds reaching the area of 7-year highs, which seemed quite logical, but at the end of the first week of October, their paths diverged. Over the past few years, this happened only at the beginning of 2018. Investors were nervous then because of the rumors that China was selling US debt. Is the Celestial Empire reverting to its old ways?

Dynamics of the USD/JPY and the yield of US Treasury bonds

Source: Trading Economics.

Beijing has this kind of weapon in its arsenal, and it can afford to use it in a trade war with the United States. An unexpected reduction in the international reserves of PBOC in September by $ 22.7 billion to $ 3,087 billion confirms this. Quite possibly, the Celestial Empire remembered the summer of 2015 and the winter of 2016 and began to support the falling yuan, but then it also led to the strengthening of safe havens. The Fed postponed the plans to normalize monetary policy, and the outlook for the global economy deteriorated.

Dynamics Shanghai Composite and the USD/JPY

Source: Trading Economics.

Investors are beginning to draw historical parallels not only from 2015-2016, but also from the events of the past century, when US import duties and the conflict between the United States and Japan led to a fall in the USD/JPY. While the impact of protectionism on the global economy is not so great, the dollar can feel confident. However, as soon as the assessment of the effects of trade wars becomes increasingly gloomy, the market rushes to reliable assets. In this regard, the IMF's reduction in global economy forecasts from 3.9% to 3.7% in 2018 is a bullish factor for the yen.

The Japanese yen reacts quite actively to events in Italy, where the skirmish between Euro-skeptics and the EU has led to an increase in the yield differential of local and German bonds to maximum levels since early 2014. Traditionally, the Swiss franc is more sensitive to political risk escalation, however, active SNB interventions allow it to strengthen against the euro. In connection with this, the yen has accepted the Swissie's functions.

Dynamics of yield differential of bonds of Italy and Germany

Source: Bloomberg.

The yen is supported by another panic in emerging markets. Worried about the rising cost of borrowing in the United States and the growing risks of a slowdown in China's GDP, carry traders withdraw from risky assets and return to funding currencies. As a result, MSCI EM falls to a 17-month bottom, and the demand for asylum is growing.

In my opinion, further dynamics of the USD/JPY to a greater extent will depend on the release of data on US inflation and rumors about the sale of Chinese treasuries than on the changes in the Italian political landscape. The acceleration of consumer prices and unconfirmed information about the activity of China in the US debt market will contribute to the growth of the dollar in the direction of ¥ 115-115.2. On the contrary, sluggish dynamics of CPI and core inflation will allow the bears to develop a correction for the pair.


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Price chart of USDJPY in real time mode

Yen is pushing boundaries

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