Yen Slides After BOJ Stays Committed to Yield Curve Control

(Bloomberg) -- The yen slumped on selling by leveraged funds after the Bank of Japan closed a tumultuous year for monetary policy by keeping its yield-curve and asset-purchase programs unchanged while pledging to keep expanding the monetary base until inflation is above 2 percent.

Japan’s currency weakened versus all major peers after BOJ Governor Haruhiko Kuroda reiterated the central bank’s commitment to pin 10-year government bond yield near zero, reinforcing the widening gap with Treasuries. Investors’ focus ahead of today’s policy meeting was whether the central bank would tweak its policy following a global bond selloff. Kuroda said at a press briefing that an appropriate yield curve has been achieved.

“Though totally expected, the yield curve control commitment remains as is,” said Ray Attrill, global co-head of FX strategy at National Australia Bank Limited. “This is what keeps the home fires burning under USD/JPY next year, unless of course U.S. yields fall back.”

Following BOJ’s first policy meeting since Donald Trump’s election victory, the board forecast that the moderate recovery trend will continue amid a pickup in exports, better business sentiment and resilience in private consumption. The yen has tumbled about 11 percent since the U.S. election, almost erasing the 15 percent gains it notched up this year in the run up to the U.S. vote. Yen short positions rose last week to the highest in a year.

Kuroda said the yen was not excessively weak as it was just back to February’s level and currency markets were reflecting a strong dollar. He also said it was too soon to discuss raising the long-term yield target.

“USD/JPY is likely to consolidate into year end following the huge increase since Trump’s election, and lift again in 2017 because of rising U.S. interest rates and capital inflows into the U.S,” said Andy Ji, a Singapore-based currency strategist at Commonwealth Bank of Australia.

The dollar strengthened against most of its major peers as Treasury yields recovered from Monday’s decline on comments from Federal Reserve Chair Janet Yellen that graduates “are entering the strongest job market in nearly a decade.” U.S. yields fell overnight after terror incidents in Turkey and Germany stoked demand for haven assets.

• USD/JPY rallied after BOJ’s announcement in the morning before extending gains to 117.96 session high during Kuroda’s press briefing in the afternoon; leverage funds were first to buy dollars after the BOJ decision, according to an Asia-based FX trader
• AUD/USD is little changed at 0.7243 after dropping to a 6-mo low earlier; sovereign yield curve flattens with 3-year touching 2% for the first time since April after RBA minutes suggest the central bank won’t ease anytime soon; CTA funds were seen selling Aussie bond futures on a weakening Aussie and flatter curve, an Asia-based trader says
• The Bloomberg dollar index gains 0.3% while 10-year U.S. Treasury yield rises 4bps to 2.585% after declining 5bps on Monday

--With assistance from Michael G. Wilson To contact the reporters on this story: Kevin Buckland in Tokyo at kbuckland1@bloomberg.net, Netty Ismail in Singapore at nismail3@bloomberg.net. To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Patricia Lui