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The yen might have clocked in another positive week, but it was knocked off its top spot. What can move the lower-yielding currency this time?

Inflation reports

Unlike in previous releases, this month’s CPI reports were staggered across several days. The official CPI reports, for example, were printed last week.

On Tuesday at 5:00 am GMT we’ll see the Bank of Japan’s (BOJ) annualized core CPI, which clocked in at 0.7% in December. Then, Tokyo’s core CPI – a potential leading indicator – is scheduled on Thursday at 11:30 pm GMT.

Household spending numbers

Aside from consumer prices, the BOJ also pays close attention to household spending and reports that give clues to its trends.

For this week, that means paying attention to:

  • retail sales report (2.6% expected vs. 3.6% previous) on Tuesday at 11:50 pm GMT;
  • consumer confidence data (44.9 expected, 44.7 previous) on Thursday at 5:00 am GMT, and
  • household spending (-0.3% expected, -0.1% previous) and unemployment rate (expected to remain at 2.8%) on Thursday at 11:30 pm GMT.

Global bond yields

As we’ve seen below, the low-yielding yen’s price action tends to take cues from global bond yield movements, especially if said movements dominate market buzz for the week.

The Fed might have already printed its meeting minutes report, but I’m seeing a lot of scheduled speeches and testimonies from Fed Chairman Powell and his gang of voting members throughout the week.

If they end up moving Treasury yield price action and affect global risk sentiment, make sure you’re around to trade the moves!

Last Week’s Price Review

After being the top-performing currency for two weeks straight, the yen was knocked off its pedestal since it’s now only the third best-performing currency this week (as of 9 am GMT). The yen’s still a net winner, though, so the yen’s winning streak ain’t over yet!

Overlay of Inverted JPY Pairs & US10Y Bond Yield (Black Line): 1-Hour Forex Chart
Overlay of Inverted JPY Pairs & US10Y Bond Yield (Black Line): 1-Hour Forex Chart

U.S. 10-year bonds yields are up for the week, thanks largely to the surge triggered by the FOMC minutes. However, the yen is also a net winner for the week. What’s up with that weirdness, yo?

Well, U.S. 10-year bond yields don’t really tell the whole story for global bond yields. This can be clearly seen if we replace U.S. 10-year bond yields with Germany’s benchmark 10-year bond yields.

Overlay of Inverted JPY Pairs & German 10Y Bond Yield (Black Line): 1-Hour Forex Chart
Overlay of Inverted JPY Pairs & German 10Y Bond Yield (Black Line): 1-Hour Forex Chart

As you can see, the correlation between bond yields and yen pairs no longer look as messed up since German bond yields were down for the week, which means a stronger yen.

Even so, there were short bouts when the yen clearly decoupled from bond yields. And I’ve marked them above for your convenience.

What happened then? Well, it’s very likely that the yen was also taking directional cues for risk sentiment.

The first instance of clear decoupling happened during Tuesday’s London session. Global bond yields were in retreat at the time. Instead of gaining strength, however, the yen either traded roughly sideways or weakened against its peers, likely because risk appetite was the dominant sentiment at the time.

As for the second clear instance of decoupling, that happened after the FOMC minutes were released since U.S. bond yields surged while most other bond yields steadied after the minutes were released. The should have either steadied or weakened, but the yen advanced against its peers instead, very likely because risk aversion made a comeback in the wake of the FOMC minutes.