Yen steams ahead as BoJ taper talk gathers momentum

The US dollar skidded further to a six-week low against the Japanese yen on Wednesday after the Bank of Japan's move to trim its government bond (JGB) purchases in the previous session stoked speculation it would ease its massive monetary stimulus.

The dollar slipped as much as 0.7 per cent to 111.765, its lowest since December 1, after Tuesday's 0.5 per cent fall when Japan's central bank reduced the amount of its JGB purchases in its regular buying operations -- a slight tweak to policy. There was no further news on Wednesday but analysts put the extended sell-off down to traders betting that the bank could be poised to begin winding down its stimulus.

The yen was also up against other currencies including the euro, against which it gained 0.5 per cent. “Japanese yields have been rising and this has been reinforcing the move on the yen,” Thu Lan Nguyen, a Frankfurt-based FX strategist at Commerzbank.

Expansionary BoJ policy

Nguyen, however, called the market expectations of an early end to an expansionary BoJ policy as “premature” because the bank can defend its 10-year yield target without buying so many bonds, and because inflation pressures in Japan remain low.

Moreover, market positioning on the Japanese yen has been extremely short as investors have ramped up its use as a funding currency in recent months to buy relatively higher yielding debt in the United States and elsewhere.

Normalising monetary policy

The dollar weakness underlines the greenback's vulnerability to other central banks' moves towards normalising monetary policy, a feature of 2017 that has continued to weigh on the dollar into 2018. Two US interest rate hikes this year are priced in but the market has only recently started to price in tightening moves by other central banks.

The dollar was down 0.2 per cent against a basket of currencies but held the key level of below $1.20 against the euro. While the majority of traders are positioned for a euro rise in the medium term, the single currency has this week traded below a nearly four-month high of $1.2089 set last week.

US Treasury yields

Yields on the 10-year US Treasury note reached a 10-month highs, partly lifted by the BOJ's action, which traders would have otherwise expected to boost the dollar. The 10-year note yield stood at 2.558 per cent in Asian trading, up from its US close of 2.546 per cent on Tuesday.

“The BoJ's move reminded traders of the fact that major central banks are willing to normalise their monetary policy," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

“I think this unwanted strengthening of the yen will make the BOJ more cautious in going forward, when they want to move toward normalisation,” he said.

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