USD/JPY touches multi-year highs on diverging yield spreads outlook

The yen weakened against the US dollar to the lowest level in five years, as the difference in yield between US Treasuries and Japanese bonds widened the most since April 2011.

Having touched the highest level since October 2008 on Thursday, USD/JPY traded at 103.58 at 08:33 GMT, gaining 0.2% for the day. The pair headed for a seventh consecutive week of gains. Support was likely to be received at December 12th low, 102.47, while resistance was to be encountered at October 6th 2008 high, 104.65.

According to Bloomberg Bond Trader Prices, the 10-year Treasury yield was little changed at 2.88% from Thursday, when it rose two basis points, while the premium yield over equivalent Japanese government bonds was 2.18 percentage points, close to the 2-1/2-year high of 2.24 percentage points touched on December 5th.

In a Financial times interview, BoJ Governor Haruhiko Kuroda said that the central bank will strive to keep ultra-easy monetary policy even beyond the time-frame of two years.

Japan is in a process of recovery after the 15-year period of deflation. Bank of Japan has been purchasing more than 7 trillion JPY (68.4 billion USD) of government bonds each month in its struggle to achieve 2% inflation in two years since April. Next policy meeting of the BoJ will be held on 19th-20th December.

“The prospect of Fed tapering, either sooner or later, and continued monetary easing by the Bank of Japan remain a powerful driver of dollar-yen gains specifically, and obviously broad yen trade-weighted depreciation,” said Callum Henderson, global head of currency research at Standard Chartered Plc in Singapore, cited by Bloomberg.

According to Standard Chartered, the yen will drop to 110 per dollar at the end of next year, while the median analysts forecast in a Bloomberg survey projects the yen to drop to 108.

The Japanese currency is the worst performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen had weakened 15% so far this year, while the greenback had appreciated 4%.

Meanwhile, the US Department of Labor released its weekly report on Thursday, which stated that the number of people, who filed for unemployment assistance in the country increased to the highest level in two months, reaching 368 000 during the week ending on December 7th. Analysts had projected that the number of initial jobless claims will fall to 320 000 the same week, compared to preceding week’s upwardly revised 300 000 claims from initially estimated 298 000.

A separate report, by the Commerce Department, showed an increase by 0.7% in nation’s retail sales in November, higher than analysts’ forecasts of a 0.6% gain. Retail sales less autos, or core retail sales, rose 0.4% compared to forecasts of a 0.2% increase. In September core retail sales rose by an upwardly revised 0.5% from a 0.2% gain previously.

Market focus has now shifted to Federal Reserve’s meeting on policy, scheduled to be conducted on December 17th-18th. According to 34% of economists, participated in a Bloomberg survey on December 6th, the central bank may begin to pare back its 85-billion-USD monthly asset purchases at this meeting, rather than wait until January or March.

Elsewhere, AUD/USD fell to a session low at 0.8914 during the early phase of Asian trade, also the pair’s lowest point since August 30th, after which consolidation followed at 0.8936, dipping 0.02% for the day. Support was likely to be found at August 30th low, 0.8892, while resistance was to be encountered at December 12th high, 0.9082.