Fundamental Evaluation Series: USD/JPY vs. yield divergence review

This one pair has been at odds with yield divergence lately after acting as an excellent responder to it from 2012 (starting period of the analysis) to summer of 2015. It kept responding to yield divergence despite a drop in oil price. 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 but the yen was strengthening.

However, trouble started surfacing after summer. We guess it was triggered by the 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 of 2015, but, the yen has strengthened from 126 to as low as 98 per dollar. Currently trading at 104.8 per dollar, in anticipation of further easing from the Bank of Japan (BoJ).

It is clear that a different force other than the yield is driving the USD/JPY exchange rate as of now and it may very well continue to do so.