Morten Helt, Senior Analyst at Danske Bank, suggests that the election of Donald Trump as the next US President has prompted a significant increase in US inflation expectations and base metal prices driven by expectations of a significant boost to public spending, including a large infrastructure spending programme.
Key Quotes
“The US yield curve has steepened significantly as higher inflation expectations have driven an increase in yields on longer dated US government bonds. USD/JPY has historically been highly correlated with yields on 10Y US Treasuries as a widening of the rate spread tends to support portfolio investments flows out of Japan and into the US. Our short-term financial model currently implies a fair value estimate of USD/JPY at 115.50 based primarily on the recent increaseinthe10Y US interest rate.”
“Moreover, USD/JPY carry has become increasingly negative with 3M FX forwards trading at the lowest level since 2008. This has made it more expensive for Japanese investors to hedge USD assets, which might eventually start to weigh on the JPY if Japanese investors lower USD hedge ratios as long USD/JPY becomes more attractive from a carry perspective.”
“Hence, if the US reflation theme continues to build a case for higher US interest rates, we see a case for further portfolio investment outflows out of Japan, which in a combination with higher FX hedging costs on USD assets is likely to weigh on JPY over the medium term.”
“Finally, we note that higher commodity prices, in particular higher oil prices, will be a negative for the Japanese current account, which has improved substantially over the past couple of years due to the combination of previous weakening of the JPY and the oil price decline. A weakening of Japan’s external balances implies less JPY appreciation pressure in the medium to long term.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD retreats toward 1.0850 despite weak US employment data
EUR/USD loses its traction and declines toward 1.0850 after testing 1.0900 earlier in the session. Because Nonfarm Payrolls data for October missed the market expectation by a wide margin due to hurricanes and strikes, the US Dollar manages to hold its ground.
GBP/USD climbs above 1.2950, looks to end week little changed
GBP/USD benefits from the improving risk mood and trades in positive territory above 1.2950 in the American session on Friday as markets ignore the weak labor market data from the US. The pair remains on track to end the week flat.
Gold clings to small gains near $2,750 after US data
Gold clings to marginal recovery gains and trades slightly above $2,750. The 10-year US Treasury bond yield struggles to push higher after the dismal October jobs report and weaker-than-expected PMI data from the US, helping XAU/USD keep it footing.
Bitcoin Weekly Forecast: Run toward fresh all-time high hinges on US presidential election results
Bitcoin could experience a price pullback in the next few days ahead of the US presidential election, analysts say, an event that will be key to determining whether and how the crypto class will be regulated in the years to come.
Bank of Japan holds rates steady amid signs of modest GDP growth
Monthly industrial production results have been mixed but generally indicate a modest recovery in third-quarter GDP. Clear guidance from the Bank of Japan remains elusive, with each upcoming meeting being pivotal.
Best Forex Brokers with Low Spreads
VERIFIED Low spreads are crucial for reducing trading costs. Explore top Forex brokers offering competitive spreads and high leverage. Compare options for EUR/USD, GBP/USD, USD/JPY, and Gold.