16 Jul 2013
Flash: Global volatility to lower following QE concerns – BMO Capital Markets
FXstreet.com (New York) - According to Stephen Gallo at BMO Capital Markets, “Fed developments over the last week are in our opinion a confirmation that the first round of QE tapering adjustment in the US yield curve has probably run its course.”
As such, “we expect a temporary shift to lower volatility in global sovereign debt markets to be more supportive for USD/JPY and act as a ceiling on JPY strength. US 2-year and 10-year yields, in terms of their relationships with USD/JPY, have driven weekly changes in the pair by roughly the same magnitude historically.” Gallo adds.
As long as sovereign debt market volatility remains below its recent peak, USD/JPY and US equity prices can therefore “play catch-up” with the move in the US 10-year yield for a time. The stabilization in the US current account deficit, for now, probably suggests that there will be far less US political pressure on Japan to maintain a stronger nominal exchange rate for the JPY, much unlike the case in the 1980s and 1990s.
As such, “we expect a temporary shift to lower volatility in global sovereign debt markets to be more supportive for USD/JPY and act as a ceiling on JPY strength. US 2-year and 10-year yields, in terms of their relationships with USD/JPY, have driven weekly changes in the pair by roughly the same magnitude historically.” Gallo adds.
As long as sovereign debt market volatility remains below its recent peak, USD/JPY and US equity prices can therefore “play catch-up” with the move in the US 10-year yield for a time. The stabilization in the US current account deficit, for now, probably suggests that there will be far less US political pressure on Japan to maintain a stronger nominal exchange rate for the JPY, much unlike the case in the 1980s and 1990s.