Yen jumps as US yields fall back and ‘Brexit’ risks creep higher – MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that as was widely expected, PM Abe announced in the Diet today that he has decided to postpone the sales tax increase from 8% to 10% from April next year until October 2019.

Key Quotes

“In explaining the move PM Abe stated that he wanted to “mobilise fiscal policy to achieve strong growth”, which suggests the government will also announce a fiscal stimulus package as well. Further details of the delay and possibly the fiscal stimulus package will be revealed by PM Abe in a press conference at 10am BST.

But as is often the case for the Japanese yen, the direction yesterday and today is being determined more by events abroad with little financial market reaction to the announcement by PM Abe, which was widely expected.

The strength of the yen in part reflects some renewed focus on ‘Brexit’ risks after a poll yesterday revealed a notable pick-up in support for ‘Leave’. That has worked to lift the yen through GBP/JPY selling but also through a softening of June rate hike expectations in the US. Those expectations are likely to be very sensitive to ‘Brexit’ sentiment over the coming two weeks ahead of the FOMC meeting.

The 2-year UST bond yield dropped around 4bps yesterday. GBP/JPY has dropped by close to 3% from yesterday’s intra-day high, the largest decline since the end of April following the disappointment when the BOJ failed to ease its monetary stance. We expect increased yen volatility over the coming weeks with US rate expectations and ‘Brexit’ sentiment influencing direction in both ways.”