- Evergrande spillover risk weighs on market sentiment.
- US 10-year bond yields rose 7% on the week, underpinning USD/JPY.
- Fed’s outlook for gradual bond tapering also weighs on market appetite.
- Fed’s Mester: “the Fed would take action if inflation is not consistent with the Fed’s objectives”.
Earlier in the Asian session, USD/JPY was trading within a tight range of 11 pips, within 110.23-34, but as European traders reached their desks, the pair has moved higher. At the time of writing, USD/JPY is trading at 110.69, up 0.34% on the day.
Evergrande shares rose 15% on Thursday. However, the default on its $83.5 USD-denominated bond interest on Thursday clouds the outlook. As reported by Reuters, the interest payment has not been made, leaving investors looking for safe havens. Further, the Fed’s plan to reduce its $120 billion in monthly bond purchases dampened appetite for riskier assets.
Rising US 10-year yields rose at least 7% on the week near monthly highs underpinning USD/JPY.
USD/JPY is also weighed down by the 10-year yield, which is up four basis points (bps) on the day, currently at 1.454%, underpinning the greenback. Despite some of Thursday’s losses, the U.S. dollar index is up 0.28% at 93.35, recovering some of Thursday’s losses.
Further, at its latest FOMC meeting, the Fed stated that gradual tapering of its monthly bond-buying program “may soon be warranted,” although it did not clarify when or how it might begin to reduce its purchases. Analysts predict they will announce the timing and size of the tapering of pandemic-related stimulus at their November meeting.
In the morning, Cleveland Fed President Loretta Mester got down to business. According to her, the Fed would take action if inflation doesn’t match its target. Additionally, she said that “asset purchases are not doing as much now, and I think the Fed can slow the pace,” further cementing the Fed’s overall opinion of tapering its QE program.
According to the U.S. Census Bureau, new home sales rose to 0.74 million in August, more than the 0.7 million expected by economists. The market had no reaction. However, as the day progresses, US bond yields as well as the general mood of the market could affect the USD/JPY pair.