Fundamental Evaluation Series: USDJPY vs. yield divergence

Fundamental Evaluation Series: USDJPY vs. yield divergence

This one pair has been at odds with yield divergence throughout 2016 as the yen benefited from risk aversion and doubts on BoJ’s abilities to ease policies further. It had shown excellent response to the yield divergence in the past, especially after Bank of Japan (BoJ) announced its quantitative easing program back in 2012. This close relationship lasted till the summer of 2015.  US-Japan 2 year yield spread rose from 0.13 percent in 2012 to 0.72 percent by May 2015 and hovered there till October and the exchange rate reached from 76 to 126 in that same period.

However, trouble started surfacing after summer. We guess it was triggered by surprise devaluation of the yuan by the Chinese central bank, People’s Bank of China (PBoC).

The yield spread kept rising in favor of the dollar. The yield spread rose more than 30 basis point since summer, but, the yen has strengthened from 126 to as low as 98.

However, after Donald Trump, the Republican candidate secured a victory in this year’s US election the exchange rate has started to respond to the yield difference once more. After Mr. Trump’s victory, the yield gap jumped suddenly by more than 25 basis points and the yen has weakened to 114 per dollar from as high as 101 per dollar.