JPY: Key influence on global market trends – AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that the the strong JPY, despite the BoJ’s Negative Interest Rate Policy (NIRP), has contributed to a range of global market developments.

Key Quotes

“NIRP/QE drove down yields, and as the JPY rallied it contributed to lower Japanese inflation expectations, further pushing down Japanese yields to remarkably and irrationally low levels.

The fall in Japanese yields spilled over to global bond markets and was a key contributor to a global scramble for yield.  Persistent delays in US Fed policy hikes, further QE policy easing by the ECB and, more recently, a rate cut and QE by the BoE have also contributed to low global bond yields, forcing investors to scramble for diminishing yields in higher risk assets, including emerging market and commodity currencies.

The scramble for yield and strong JPY distracted the market from a modest improvement in the USD yield advantage for much of the year.  Most of this improvement in the USD yield advantage came from lower yields abroad, rather than higher US yields.  Nevertheless, the USD has significantly under-performed this improvement in its yield advantage.

As the market scrambled for higher yielding assets, it turned to the USD to fund these investments (i.e. selling the USD and/or borrowing USD to buy higher yielding assets and currencies).  This tended to weaken the USD, even though its yield advantage improved moderately and the cost of borrowing USD increased.

The rising and volatile JPY discouraged investors from using it as a funding currency, and the rising JPY itself tended to spillover to broader USD weakness.  As such, the market came to see the USD as a relatively weak currency this year, further encouraging investors to use the USD as the preferred funding currency.”