Yen losses snowball as yields forge higher
2022.04.18 13:05
- Yen continues to sink despite BoJ’s soft verbal intervention
- Stocks trade heavy as yields soar, China GDP offers no relief
- Gold flies in the face of negative macro trends – who’s loading up?
Yen demolition
The Japanese yen has been blown to smithereens. Central banks around the world are raising interest rates to combat spiraling inflation, yet the Bank of Japan refuses to play this game. That’s because there’s no inflation to fight – the annual CPI rate in Japan is still stuck around 1%.
BoJ Governor Kuroda tried to slow the bleeding today by saying that the yen’s rapid weakening could have some negative economic implications. However, his remarks were eclipsed by another spike higher in global bond yields, which pushed the yen to fresh two-decade lows against the US dollar.
There’s growing speculation about FX intervention to save the yen, although that seems unlikely. Japan would have to intervene alone since the Americans and Europeans wouldn’t agree to weaken their own currencies in this inflationary environment, and Japanese authorities haven’t even described the moves as “disorderly” yet to foreshadow action.
The yen’s troubles will likely persist until the BoJ loosens its yield curve control and allows Japanese yields to trade higher. With the economy improving and the yield ceiling becoming harder to defend as foreign yields race higher, that could happen as soon as this summer or fall.
Dollar shines, stocks under pressure
In the broader FX complex, the dollar continues to steamroll its rivals, turbocharged by expectations that the Fed will raise interest rates with brute force. The frantic rally in US yields shows no signs of relenting, with the 10-year Treasury yield crossing above the 2.86% mark today for the first time since 2018.
This is an ominous sign for riskier assets like equities. Higher bond yields tend to compress valuation multiples in the stock market. The higher the discount rate goes, the lower the present value of earnings that are far into the future. Investors don’t need to take wild chances on unprofitable stocks if bonds suddenly pay a return.
Accordingly, shares on Wall Street are poised to open in the red today. With bond markets in disarray and the earnings season kicking into higher gear this week, the turbulence is likely to continue. Most European markets will remain closed for the holidays.
Gold defies the playbook
Crossing into commodity markets, the rally in gold remains an unexplained mystery. Bullion keeps grinding towards record highs even though the dollar continues to appreciate and real US yields are about to cross into positive territory – both developments that should knock the wind out of the non-interest bearing metal.
Either safe haven demand has nullified these negative forces or some central bank is acting like a whale, using this opportunity to load up on bullion. The crippling sanctions on the Russian central bank made it clear that FX reserves are not as solid as gold in a crisis. The next resistance barricade is the psychological $2000/ounce region.
In China, the nation’s GDP stats for Q1 were released overnight. GDP growth was solid but that boils down to an implosion in imports, which mechanically boosts growth in the GDP calculation. Instead, the real damage from the draconian lockdowns was reflected in the soft retail sales numbers.
Beyond the sour mood in equity markets, this is another reason why the Australian and New Zealand dollars are trading so heavy today. Economic growth in both economies could take a substantial hit if there are negative spillovers from China. 
