- In the midst of a stable US Treasury yield, the USD/JPY is looking for a direction bias.
- Global yield complexes are impacted by the ECB rate hike, but central banks remain stable despite the liquidity crisis.
- It is unlikely that the Fed’s March FOMC meeting will mark a turning point in the cycle of rate hikes.
On the strength of weaker US Treasury (UST) yields, the USD/JPY price is declining and aiming to challenge the 130.00 level. The USD/JPY pair gained on Thursday as a result of a stabilisation in UST rates, despite the US Dollar’s overall softness not yet signalling anything major. Earlier in the week, the risk-averse atmosphere was sparked by a liquidity crisis among banks, which caused UST to decline.
The Federal Reserve’s (Fed) revised expectations for a rate hike in March, which may be the cause of the declining UST yields. Yet, the episode in which Silicon Valley Bank (SVB) lost liquidity and transferred it to Credit Suisse has caused a new wave of gloom for the Fed’s March FOMC meeting.
The idea was straightforward: in light of a clogged financial ecosystem, the Fed shouldn’t announce a large rate hike at the FOMC meeting in March. As a result, the yield price actions took the aforementioned expectation into account. The UST yields-sensitive USD/JPY began to decline as a result.
Investors were lowering their expectations for rate increases from other central banks like the European Central Bank in the meanwhile, along with the Fed (ECB). In contrast, the ECB delivered a pre-committed rate increase of 50 basis points on Thursday.
Last week, sentiment changed dramatically as some important central banks intervened in the liquidity issues with backstop plans, forcing the ECB to stick with its rate-hiking schedule. Global yield complexes increased on Thursday following the ECB event. Furthermore, it appears that central banks are unwilling to make any changes until the ongoing liquidity problem gets worse, and they will likely continue on their current course.
An earlier comment from US Treasury Secretary Yellen suggested that government refunds of uninsured deposits will not be granted to every bank that collapses and the Fitch rating agency said “our base assumption is that recent developments in the US will not prompt dramatic shifts in US monetary policy”.
Hence, any radical change currently appears premature. A significant change in the rate-hiking cycle is extremely improbable, but the Fed may announce a 25 basis point increase at the FOMC meeting in March.