Yen Surges to Highest Level since November

Yen rose versus G-10 peers, drives dollar-yen value to lowest level since November

The Japanese yen surged in value versus all of its G-10 peers, while the dollar pared gains, driving the dollar-yen value to its lowest level since November 29th, 2016, as reported by Bloomberg on February 06th, 2017. Traders are looking to reverse their existing yen short positions across several currency pairs, notably against the Canadian dollar and the Australian dollar. The yen strengthened through 112.00 per dollar after an earlier approach to that level was foiled with a rebound in the greenback against a basket of major global currencies.

Foreign exchange traders are also trying to adjust their positioning against several currencies given that the Federal Reserve is intent on hiking rates two or three times in 2017. Moreover, the new Trump administration has expressed some misgivings about the dollar strength in recent months. The Fed raised its benchmark overnight interest rate in December 2016 by 25 basis points to a range of 0.50% to 0.75% and forecast three rate hikes in 2017. On February 01st, 2017, the Fed kept its benchmark overnight interest rate unchanged, saying that it expected labor market conditions and other key economic indicators to strengthen further before making further hiking rates again this year.

The USD/JPY traded at close to 111.70 after break of technical support at 112.06 from the early February lows and from the November 30th, 2016 lows. The yen hit its lowest level since November 29th, 2016, on February 06th, 2017 and closed 0.77% stronger at 111.74 per dollar. Traders are awaiting the outcome of a crucial meeting between Japan Prime Minister Abe and President Trump in Washington on Friday, February 10th, 2017, where Abe plans to offer a vision for greater Japanese investment in the US. Abe’s five-pronged program, titled “US-Japan Growth and Employment Initiative,” says the two nations could work together to generate 700,000 jobs in the US and create new markets worth $450 billion over the next decade.

The EUR/USD traded at close to 1.0750 after ECB President Draghi’s speech at the European parliament. The EUR drop was cushioned by a number of bids that extended from 1.0720 to 1.0700, helping the currency finish 0.31% stronger USD1.0750 on February 06th, 2017.

In a parallel development, the 10-year Treasury yield declined to fresh lows after trading flows were erratic and traders sought fresh cues. The Bloomberg dollar index has dropped for six straight weeks after surging in November 2016 after Trump’s election victory. At the same time, predictable monetary policies in Japan and the euro zone show no signs of abating, leaving the dollar with a yield and policy advantage.

European Central Bank (ECB) President Mario Draghi reiterated that “a benign inflation outlook in the euro area warrants continued policy accommodation”, while in Japan, the Bank of Japan (BOJ) continues to manage its yield curve to keep long-term rates near zero. Investors are now focusing on the BOJ’s efforts to contain a surge in yields amid a global bond sell-off. The central bank’s shift in policy framework last year to control the yield curve was aimed at making its stimulus program more sustainable as it neared the set limits to its asset purchases. The BOJ’s increasingly radical stimulus efforts are being closed watched by other global central banks which are also struggling to revive growth, such as the European Central Bank. Many investors fear central banks have nearly exhausted the limits of what monetary policy can do, putting pressure back on governments to step up spending.

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