The Dollar/Yen surged early Friday, but gave back about half of those gains into the close. A widening interest rate differential between U.S. Government bonds and Japanese Government bonds made the U.S. Dollar a more attractive investment.
Benchmark U.S. Treasury yields rose to their highest levels since March on Friday as investors closed positions ahead of a long U.S. holiday weekend. U.S. financial markets are closed on Monday for Presidents’ Day. Also giving the U.S. Dollar a boost were inflation expectations, which edged up to a six-year high.
On Friday, the USD/JPY settled at 104.922, up 0.188 or +0.18%.
Benchmark 10-year yields rose to 1.203%, just pipping an 11-month high of 1.20% that was set on Monday. Thirty-year yields rose to 2.007%, also inching above Monday’s one-year high of 2.006%.
Yields have largely held in a range as investors wait on a new catalyst to send yields substantially higher, with U.S. fiscal spending seen as the next major focus.
In economic news, data on Friday showed that U.S. consumer sentiment unexpectedly fell in early February amid growing pessimism about the economy among households with annual incomes below $75,000.
In other news, inflation expectations rose as high as 2.23% on Friday, the highest since 2014. That means that investors are now pricing in average annual inflation of 2.23% for the next 10 years.
The price action in the Treasury market and the USD/JPY suggests that investors are expecting that new spending and faster growth as businesses reopen after COVID-19 related shutdowns will also boost inflation.
USD/JPY investors are also monitoring the progress toward President Joe Biden’s coronavirus relief package in Washington. Biden met with a bipartisan group of mayors and governors on Friday as he continued to push for approval of a $1.9 trillion coronavirus relief plan to bolster economic growth and help millions of unemployed workers.
“Our base case view is for a $1 trillion package, but I think market expectations are gravitating towards something much larger,” said Zachary Griffiths, a macro strategist at Wells Fargo in Charlotte.
The direction of the USD/JPY will continue to be mostly influenced by the direction of U.S. Treasury yields. Japanese Government bond yields are expected to remain steady. Driving the direction of yields will be fiscal spending.
“Market focus remains on the size and timing of the U.S. fiscal stimulus, inflation expectations and progress of the vaccine rollout,” said Standard Chartered analyst Suki Cooper.