🔥 Premium AI-powered Stock Picks from InvestingPro Now up to 50% OffCLAIM SALE

If U.S. Yields Fall Below 1%, the Yen Could Hit 90, RBC Says

Published 09/27/2019, 09:08 AM
Updated 09/27/2019, 01:00 PM
If U.S. Yields Fall Below 1%, the Yen Could Hit 90, RBC Says

(Bloomberg) -- Another leg higher in the sovereign bond rally that’s captivated investors over the past year could push 10-year Treasuries yields below 1% and send the yen surging more than 16% from current levels, according to an RBC Capital Markets analysis.

The scenario for the yen to surge to 90 per dollar isn’t the bank’s main forecast. In such a risk sequence, domestic Japanese investors would be scrambling to hedge, exacerbating the currency move, according to RBC’s chief currency strategist Adam Cole.

His team expects the more likely outcome over the next six to 12 months is for the yen to weaken, on the assumption there’s limited easing from the Federal Reserve and that costs remain elevated for hedging overseas assets.

Hedging costs are a critical component for the bank’s alternative scenario to become a reality. This year’s two Fed cuts have lowered the price of hedging back to levels seen at the start of 2018, but forward-curve pricing implies a gap could open up, according to the RBC analysis.

“If rates evolve in line with the forward curve (green line), however, the wedge between Japan’s portfolio yield and the cost of hedging becomes significant and it would be surprising if we did not see Japanese investors (including, for the first time in a Fed easing cycle, the giant GPIF) scrambling to put hedges onto foreign investments,” they wrote in the report, referencing the Japan’s Government Pension Investment Fund -- the world’s largest pension fund.

“In a nutshell, this is why we think U.S. rates are at such a critical juncture for dollar-yen,” the team concluded.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.