Tapering may not significantly impact other major currencies except Yen
Bank of Japan’s (BoJ) aggressive Quantitative Easing (QE) pushed the nation’s yield curve to its flattest, relative to the U.S., prompting local investors to seek better returns in the Treasuries market, such as Treasury bills in the United States.
The BoJ’s record bond purchases are cutting returns that investors can expect from a “roll down” strategy, which works with longer bond yields more than shorter-dated ones. But the BoJ’s current scenario encourages investors to invest in riskier assets, such as Equities or overseas capital markets, like securities in the U.S. This could be another main reason U.S. equities and Treasury prices could be well supported when tapering expectations arise again.
The BoJ can still manage the long-term interest rate well, while many major economies rise across the board. Bank of Japan Governor Haruhiko Kuroda aims to put downward pressure on the yield curve as a whole through massive purchases of JGBs.
The U.S. jobs data and market reaction are set up for the Federal Reserve (Fed) to start tapering QE as early as week. When Ben Bernanke introduced his tapering idea earlier this year, markets reacted drastically. The advance of the U.S. stock market paused and 10-year Treasury yields rose sharply. However, communication improved between the market and the Federal Reserve. The 10-year yield stays well below 3%.
The rise in U.S. rates also sparked a flow of money back to the U.S., not from emerging markets, but only from the JGB market. The yield curve in the U.S. has been rising for a while, despite an unaggressive pace, as the Fed is set to taper its QE. So far, the JGB yield curve is flattening. Investors could apply the “carry trade” methodology on the USDJPY, although U.S. Dollar denominated assets still offer a very low yield.
In Europe, strong economic data and little action from the European Central Bank (ECB) recently sent the EURUSD on a 6-day gain.
Top News Today
Reserve Bank of New Zealand (RBNZ) Cash Rate Decision
I expect figures to come in at 2.5 unchanged.
Australia’s Employment Change
I expect figures to come in at 5,000.
Continue looking to Short AUDNZD at 1.1055
The AUDNZD retraced slightly higher yesterday and moved toward to our entry price at 1.1055. The AUDNZD has been in a clear downtrend since March this year and the pair dipped below the key level at 1.10.
Australia will release its employment report tomorrow. Due to the subdued Gross Domestic Product (GDP) report released last week, the labor market could grow at a modest pace as well. This encourages the Reserve Bank of Australia (RBA) to remain dovish.
I would like to Short the AUDNZD if the pair rebounds to 1.1055,
Entry Price = 1.1055
Stop Loss = 1.1105
1st Profit = 1.1005
2nd Profit = 1.0950
Previous Daily Market Report: Daily Market Report for 10 December 2013: Market Seems to Understand That Tapering Is Not Tightening