USD/JPY: What’s Behind This Power Move?

05/28/2009 12:01 pm EST

Focus: FOREX

Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

All of the action in the currency market today centers around USD/JPY. Over the past 24 hours, the currency pair has surged close to 2%, pushing all of the yen crosses higher.

So What’s Behind the Power Move?

It is no secret that the Japanese love yield. They were the primary buyers behind the ever-so-popular carry trade that lasted from 2001 to 2007. On Wednesday, in my Daily Currency Focus, I talked about how investors sold long-term bonds aggressively. This drove ten-year yields to the highest level since November 2008 and 30-year yields to the highest level since August 2008.

Even though the carry trade collapsed in 2008, there are finally signs of stability (cue this morning’s US durable goods and jobless claims reports), giving Japanese investors the confidence to dip their toes back into the water. With their own country offering next to nothing with regards to yield, the Japanese are looking for other ways to earn some interest on their money. Therefore, the rise in US long-term bond yields has attracted Japanese investors back into the Treasury markets. The following chart illustrates the correlation between the 30-year bond yield and USD/JPY.

Judging from the chart below, there is decent chance that USD/JPY will test 100.

By Kathy Lien, Director of Currency Research at GFTForex.com

 

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