Japanese Yen Staggers Currency Basket Amid Global Treasury Yield Rally

It was another poor weekly session for the Japanese yen as the JPY slumped against other top currencies following a rally in benchmark Treasury yields in the US and Europe. With the Bank of Japan (BoJ)’s 0.25% cap on 10-year JGB yield, the widening gaps come as no surprise.

The British pound (GBP) was the second worst-performing currency last week amid stagflation risks, while the Swiss franc (CHF) softened.

The Canadian dollar (CAD) recorded the strongest performance last week following sentiment boosts from a rally in oil prices and a hawkish Bank of Canada (BoC) rate hike.

The Australian dollar (AUD) was the second strongest performer as the Reserve Bank of Australia tried to close the policy gap with other central banks.

The US dollar (DXY) had a relatively quiet session and ended the week as the third strongest, as its upside potential got capped by a widening yield spread with Germany. Germany’s 10-year bund yield spiked to an 8-year high last week, closing the week at a solid 1.279. This rally came amid increasing expectations that the European Central Bank (ECB) would announce a halt in asset purchases this week and prepare for a rate hike in July. However, it remains uncertain whether lending rates would exit negative levels in July or September.

US Treasury Yield Rallies as Fed Prepares for Successive Rate Hikes

The US 10-year yield also recorded a notable rebound towards 2.957 last week. Some lawmakers floated the idea of halting its monetary policy tightening plan in September to evaluate the effect of the successive 50 basis points (bps) rate hikes. However, the Fed yielded to hawkish policy proponents, who assert that hikes should proceed as planned.

Finally, the diverged upside potential in German and US benchmark yields could maintain a capped rally by the dollar against the euro, creating room for more upside for the EUR/USD pair.