The yen has continued to weaken despite the Bank of Japan’s rate hike, with rising US yields seen as the main factor. There are signs that the funding currency for carry trades is changing from the yen to the Swiss franc.
The Bank of Japan raised its policy rate by 25bp from 1.00% to 1.25%, but dissenting votes from BOJ policy board members Asada Toichiro (浅田統一郎) and Sato Ayano (佐藤綾野) led the market to view the BOJ as dovish. Although rate hikes are moving forward, the reaction in the equity and foreign exchange markets has been limited, revealing that movements in US yields are more significant in driving yen weakness than the BOJ’s actions.
The US-Japan yield spread moved more than the BOJ’s rate hike, with the rise in 2-year US Treasury yields accelerating and the interest-rate gap between the US and Japan widening. On 23 September, long-term US yields reached their highest level since 2007, reinforcing the pattern of continued dollar strength. By contrast, 2-year Japanese government bond yields moved little, leading to the conclusion that the main driver of yen weakness is rising US yields rather than the BOJ’s actions.
Volatility in the foreign exchange market has been low over the past week, with “low volatility” conditions appearing across the market, including EUR/USD remaining within its range. Growth and low volatility are cited as conditions for carry trades, and the flow of selling low-yielding currencies, including the yen, to buy higher-yielding currencies has continued.
There are signs that the main funding currency for the current yen carry trade is changing from the yen to the Swiss franc. With the SNB’s policy rate at 0% compared with the BOJ’s target rate, and little prospect of a rate hike before year-end, the Swiss franc is increasingly seen as offering a more favorable funding cost than the yen. In addition, intervention risk remains high because of the coordinated intervention in July and the “house” remarks, but actual market movements in the CHF have been more restrained.
The next focus will be developments at the SNB meeting on 24 September and the BOJ’s monetary policy meeting. Attention will be on how these events affect selling on rallies in CHF/JPY and the restructuring of yen carry trades.