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💹⚖️Yen, Treasuries Correlation At Lowest Level In More Than A Year: Cable FX Macro

  • The USD/JPY pair has typically exhibited a positive correlation with US Treasury yields, especially since the early 2000s. When US yields increase, the dollar often strengthens against the yen because higher yields draw capital inflows into US bonds, thereby raising demand for USD.

  • Japan's low or negative interest rates have made the yen a favored "funding currency" for carry trades, where investors borrow in yen to invest in higher-yielding assets such as US Treasuries. Rising US yields enhance this effect, boosting USD/JPY.

  • In 2023, the BoJ began easing YCC, allowing 10-year JGB yields to rise (e.g., to 0.555% in July 2023, the highest since 2014). This narrowed the US-Japan yield gap slightly, contributing to yen volatility. USD/JPY rallied to 150.18 by October 2024 and 148.873 by September 3, 2025, driven by US yields rising (e.g., 10-year Treasury at ~4% in 2024) and global bond market sell-offs.

  • The chart below illustrates the long end of the U.S. Treasury curve alongside the USD/JPY spot over the past year and a half. Historically, the correlation coefficient has been positive and statistically significant. However, since 'Liberation Day' in early April, this relationship has significantly weakened. It is important to note that most cross-asset price reactions to the April event have now been reversed, and trade tensions no longer pose the same level of risk as they did a few months ago.

  • The BoJ’s rate hike to 0.5% in January 2025 and expectations of further hikes (to 1.0% by year-end) have supported the yen, but rising US yields and trade tensions (e.g., US tariffs under Trump) continue to pressure USD/JPY upward.

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