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The dollar and yen ended sharply lower last week in response to a significant change in US Federal Reserve policy and its negative impact on US Treasury yields. The Fed's decision to suspend rate hikes in 2019 has helped narrow the spread between US and US government bond yields, making the US dollar a less desirable investment.
Last week, the USD / JPY stood at 109,919, down from 1,550 or -1.39%.
Recapitulation of the Federal Reserve
On March 20, the US Federal Reserve left its key rate unchanged while not expecting any rate hike in 2019, dramatically highlighting its intention to "wait" for any further increase. Central bank policymakers also reduced their US economic growth forecast this year to 2.1%, down from the previous forecast of 2.3% and the pace of growth of about 3% of 2018.
"We expect some weakening, but we do not expect a recession," Federal Reserve Chairman Jerome Powell said at a news conference. In its policy statement, the Fed said the labor market remains "strong," while noting that "growth in economic activity has slowed" since the end of 2018.
The Fed also announced that it would stop reducing its bond portfolio in September, which would help maintain long-term interest rates.
Weekly forecasts
All eyes are probably on the relationship between US government bond yields and Japanese government bond yields. Last week, US yields dipped, reversing the yield curve, fueling fears of an economic recession on the horizon.
On Friday, the gap between the 3-month Treasury bill and the 10-year Treasury bill became negative for the first time since 2007. Investors consider that it's all about money. a warning sign of an upcoming recession.
At Friday's close, the 3-month Treasury bill yield was 2.459%, while the 10-year Treasury note yield was 2.437%, according to Refinitiv TradeWeb data. It was the first time in twelve years that the spread was reaching a negative territory.
"I want to point out that the gap between three months and ten years is important because the Fed has done a lot of research into the best predictions for future recessions and has found it preferable. . Hill added, however, that while the recent reversal does not guarantee a recession, BMO's work on the Cleveland and New York Fed models suggests a 30 percent recession probability over the next 12 months.
The chief economic advisor to President Donald Trump, Larry Kudlow, has acknowledged that the gap between 3-month yield and 10-year yield is the most important difference to watch out for.
Other news
A strong sell of US stock index futures in reaction to a fall in Asian stock markets also helps to put pressure on the USD / JPY. The weakness of the stock market encourages investors to take refuge in the Japanese yen, a haven of peace.
Japan has not released any major reports this week, but US investors will have the opportunity to respond to new data on consumer confidence and final GDP. However, price action will depend to a large extent on the evolution of US Treasury yields. Expect the USD / JPY to continue to weaken as Treasury yields continue to fall.
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