Yen Remains On Back Foot as JGB Extends Non-Correlation with Global Bond Market

The Japanese yen continued its losing streak last week to close as the worst loser in last week’s session, as global benchmark treasury yields, except the JGB, spiked. The Bank of Japan’s (BoJ) cap on the 10-year JGB yield resulted in a widening spread and persistent JPY sell-off.

Meanwhile, the euro showed some broader weakness but remained range-bound against the dollar. That said, analysts expect an extended drop in the EUR/CHF to prompt some bearish pull in the EUR/USD.

Commodity-based currencies continued to dominate the market, with Aussie posting the best performance last week. While the Reserve Bank of Australia (RBI) has not shown any intentions to alter its outlook anytime soon, traders have already begun pricing in an aggressive tightening campaign from the bank should the cycle start late. Also, as a massive exporter of agricultural produce and raw materials, the AUD will continue to enjoy the windfall in the commodity sector.

Global benchmark treasury yields marked some positive momentum across the board, as investors placed more aggressive bets on faster monetary policy normalization and higher inflation. The German 10-year bund yield jumped 0.218 last week to 0.589, its highest point since 2018. Also, the UM 10-year gilt yield spiked 0.197 at 1.697, a level not seen since 2016.

The US 10-year yield also recorded a significant jump with 0.344 to 2.492 after breaking the 2.5 mark. That said, the near-term outlook remains bullish as long as the 2.299 support level remains unbroken. Moving on, the next target is a 161.8% projection of 1.343 to 2.065 from 1.682 at 2.850.

Yen Bearishness to Continue Until BoJ Implements Policy Adjustment

As mentioned earlier, the Japanese yen’s severe weakness can get traced to the sluggishness in Japanese yields. Interestingly, the 10-year JGB yield climbed by 0.032 to 0.240 last week. However, the rally fell off as it approached the 0.25 area. Worth mentioning is that the BoJ pegs the 10-year bond yield to 0%, with a 25 basis points fluctuation allowance. That said, 0.25% was the level that triggered a BoJ intervention scheme last month. Analysts argue that unless the financial institution reworks its policy, the yield gap with other bond markets will continue to grow.