A growing theme from the first quarter has been rising global growth and
inflation expectations. Fairly swift vaccination rollouts in the United
States, as well as President Joe Bidens US$1.9 trillion Covid relief
package, have been driving up longer-term Treasury yields. The markets
are slowly pricing in that the Federal Reserve could begin hiking rates
sooner than expected. Fed Funds Futures indicate that there is about a
60% chance of a hike by the end of 2022.
Meanwhile, the Bank of Japan seems more likely to keep its loose
monetary policy taps open for longer. Benchmark lending rates in Japan
have been negative for some time due to a persistent struggle of trying
to bring up stubbornly low inflation. The central bank did announce in
March that it would implement a yield range target of about 25 basis
points on either side of the 10-year yield mark of 0.0%. As such, JPY
will likely be vulnerable to rising external bond yields, remaining a
key funding currency for the carry trade.
While central banks such as the RBA and ECB have taken a more prominent
stance against rising longer-term bond yields, the Fed appears to be
relatively more sanguine. Chair Jerome Powell expressed little concern
about them in March, perhaps leaving the door open for yields to
continue climbing alongside growth expectations. That may leave the
Japanese Yen vulnerable as traders chase returns outside of the
island-nation economy. However, that doesnt mean that it is all clear
for the Yen to resume its downward trajectory.
For one thing, the relatively slow rollout of Covid vaccines in Europe
is working to cool GDP estimates. Hiccups can emerge, such as with what
happened when Hong Kong suspended Pfizer-BioNTech vaccinations amid
packaging defects. There is also the outcome of where core inflation,
particularly out of the US, disappoints relative to headline figures.
The former matter more to the Fed, especially as it views near-term
inflationary pressures as transitory.
Still, President Biden is anticipated to deliver more fiscal support,
via infrastructure spending. This could further boost economic growth,
opening the door for Treasury yields to resume last years bottom.
Consequentially, this may add life to the rotation trade out of growth
and into value stocks. Further market volatility may thus offset some
weakness in the anti-risk Japanese Yen depending on price action in
global government bond yields.
