Greg Gibbs, Analyst at Amplifying Global FX Capital, suggests that so far this year, USD/JPY has become much more loosely related to US yields and QE has been forgotten since 2016; perhaps it is returning again as a factor contributing to recent weakness in JPY.
“The BoJ has reduced its pace of purchases somewhat since implementing yield curve control in Sep-2016, capping 10-year yields below 10bp. Nevertheless, as a percentage of GDP, the BoJ’s balance sheet has continued to grow, reaching close to 100% of annual GDP.”
“The Fed’s balance sheet has been declining as a percentage of GDP since 2014; at an increasing rate since Sep 2017 when it began QT.”
“The diverging size of their balance sheets could be coming back into the equation for USD/JPY.”
“If the market is returning to consider relative QE, then it is possible that USD/JPY could move significantly higher again.”
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