Yield differentials point to lower yen futures

The combination of better than expected data in the U.S. and an accommodative central bank in Japan has pushed Yen futures (CME:J6U13) lower.  The Bank of Japan (BOJ) is only at the beginning of its quantitative easing plan, and the repatriation of funds by Japanese investors has created headwinds for the BOJ, which is hampering the growth process.  With growth in Japan just beginning to show signs of traction, Yen futures should decline in the months to come.

The yield differential is usually a strong driving force behind the movements in the currency market.  The yield differential is the difference between one country’s yield on government bonds and another country’s yield on government bonds.  The yield differential between U.S. 10-year bonds (CBOT:ZBU13) and Japanese 10-year bonds has climbed to 182 basis points, allowing long term investors to benefit from holding U.S. bonds relative to Japanese bonds.  The differential is rising because the U.S. economy is starting to show signs of growth, which is driving up yields across the interest rate curve.

The most recent data point of note was the July 5 Employment report released by the Department of Labor.  According to the BLS, nonfarm payrolls increased by 195,000 jobs compared to the 150,000 expected by economists.  April and May’s numbers were also revised.  April increased by 20,000 jobs while May saw an increase of 50,000 jobs.  In addition to the positive report, average hourly earnings increased by .4%, which was more than expected.  In a separate report, generated from a household survey, the unemployment rate remained unchanged at 7.6%.  This was largely due to an increase in the participation rate from 63.4% to 63.5%.  Almost immediately after the government employment report, U.S. 10-year yields increased 11 basis points reaching a three-year high.

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