Bank Of Japan's Yield Curve Tweak Tilts Currency Market Sentiment

(RTTNews) - Currency market movement during the week ended December 23 was primarily dictated by the sentiment surrounding Bank of Japan's move to expand its yield curve control range. The move, which markets perceived as a surprise shift in Bank of Japan's ultra-dovish monetary policy stance created turmoil in currency and stock markets worldwide. In line with its yield curve control policy, the Bank of Japan started buying government bonds to keep yields low. The low-rates regime was aimed at encouraging consumers to spend and businesses to invest so that the risk of deflation could be staved off. However, the bond-buying and the low interest rate regime failed to boost the economy as expected and instead undermined the value of the yen, causing a spurt in inflation.

At the monetary policy meeting held on December 20, BoJ expanded the range of this yield curve control from 0.25 percentage points to 0.5 percentage points, thereby allowing higher yields on long term debt. Japan's ten-year government bond yield touched a high of 0.485 percent, versus the high of 0.257 touched in the previous week.

The surprise shift from the super-easy monetary policy stance lifted the yen versus the Dollar, dragging down the Dollar Index. The yen has a 13.6 percent weight in the Dollar Index.

Last week, the Dollar Index, which measures the strength of the Dollar against a basket of six currencies viz euro, British pound, Canadian Dollar, Swedish krona and Swiss Franc besides Japanese Yen, opened at 104.84 and strengthened to the week's high of 104.93 by close on Monday. BoJ's yield curve bombshell saw the Dollar Index plunging to 103.75 by Thursday, before finally ending the week at 104.31. The USD/JPY pair which closed at 136.69 on December 16 dropped to 132.79 by the end of the succeeding week. Ahead of the BoJ decision, the USD/JPY pair was at 137.48. The yen's strength, post the announcement caused the USD/JPY pair to touch a low of 130.57.

The euro and the pound too experienced turmoil in the wake of the announcement by BoJ. The EUR/USD pair which opened the week at 1.0591 closed at 1.0614 after touching a high of 1.0660 and a low of 1.0573. The GBP/USD pair touched a high of 1.2243 ahead of the BoJ announcement but plunged to 1.1992 soon after. The pair closed at 1.2058, versus the previous close of 1.2140.

The yen's strength in the wake of the BoJ announcement was short-lived as the Summary of Opinions released by the Bank of Japan on December 28 indicated that the expansion of the range of 10-year JGB yield fluctuations from the target level was not intended to change the direction of monetary easing. The yen weakened after the BoJ release said it was a policy measure aimed at making the current monetary easing more sustainable amid global inflation.

The DXY is currently at 104.09 whereas the USD/JPY pair has increased to 133.71. The EUR/USD pair is at 1.0641 whereas the GBP/USD pair is at 1.2077. The Dollar's sentiment in the days ahead could be swayed a lot by the tone of the FOMC minutes due in the first week of January.