Yen Turns Positive Before BoJ Statement; Fed’s Dudley Is “Nervous”

by on May 20, 2014 8:45 pm BST

The yen reversed loses and headed into positive territory, as US treasury yields continue to decline on risk aversion and stock sell-off. The reversal in the Japanese currency is happening just as the Bank of Japan (BoJ) will start their two-day meeting on monetary policy, which is expected to remain relatively unchanged.

Yen cross-pairs fell on speculation regarding the impending BoJ monetary policy statement. Inflation has been a key focus for the central bank and consumer prices have steadily increased at its fastest pace in over two decades. Market participants are uncertain on whether or not more easing will ensue in the near-term, with many seeing additional stimulus being added in late summer or early fall.

The move in USDJPY has been strongly correlated to the moves in the treasury market. The US 10-year has been hovering around 2.5 percent, since bouncing off of 2.47 percent on May 15. “Dollar-yen is following today’s rate move, and rates are grinding a little bit lower,” said Brad Bechtel, managing director at Faros Trading LLC.

Traders are also feeding on comments made by Federal Reserve Bank of New York President William Dudley today, just ahead of tomorrow’s FOMC minutes statement. Dudley is dovish, and he believes the eventual rate of monetary policy tightening “will probably be relatively slow.” 

The New York Fed President said the economy could get back to three percent growth this year with some strengthening next year. However, there is a key underlying tone in Dudley’s comments. He, like much of the Fed, do not know where the economy is heading. The economic forecast includes “considerable uncertainty,” he said.

Low volatility in various markets is also troubling him. “It’s not just fixed income, it’s fixed income, foreign exchange, and equities,” he said adding “that makes me a little nervous.”

The problem is, Dudley and other members of the Federal Reserve cannot contemplate that it is their own policies that cause economic uncertainty and low-volatility that makes him “nervous.” There is unprecedented complacency leading into 2014, and it is continuing to hold equities near all-time highs. The only thing that continually grew during the five years of asset purchases and near-zero interest rates were risk assets.