US Treasury's Bond Move Sends Japanese Yen into Unforeseen Decline
The Japanese Yen's recent performance was unexpected, and it wasn't due to any action taken by Tokyo. Instead, the US Treasury's decision to increase its liquidity support buyback operations in longer-dated bonds had a significant impact on the pair.
On Wednesday, USD/JPY closed 0.92% lower just above 158.00, marking the largest single-session decline since the early-August intervention. The US Treasury's move to double the size of its liquidity support buyback operations in longer-dated bonds from $2 billion to at least $4 billion, effective September 9 through November 4, put downward pressure on the pair.
The thirty-year bond had printed above 5.33% on August 18, its highest since June 2007, and gave back close to ten basis points inside the afternoon, with the ten-year easing toward 4.65%. Japan's policy rate is 1.00% against a 3.50% to 3.75% band in the United States, making this pair a spread instrument wearing a currency ticker.
The intervention moves the spot rate but leaves the spread exactly where it was, which is why a record joint operation of 8.45 trillion Yen in a single session, followed by roughly 5.3 trillion more alongside the American Treasury, bought about eight big figures and surrendered close to half of them inside a fortnight.
The Bank of Japan (BoJ) held at 1.00% in July while warning that underlying inflation could overshoot its target, and market pricing for a September increase now sits just under 80%, up from around 65% in the first week of August.