Jump in US Yields Boosts Dollar/Yen; RBA Calls for Fiscal Stimulus; RBNZ Boosts QE

The Asia-Pacific currencies finished mixed against the U.S. Dollar last week. Higher U.S. Treasury yields helped make the dollar a more attractive investment than the Japanese Yen. However, another element of divergence opened by in the Tasman Sea where the Australian Dollar posted a small gain and the New Zealand Dollar, a marginal loss.

Uptick in US Treasury Yields Weighs on Japanese Yen

A jump in U.S. Treasury yields helped boost the Dollar/Yen because it widened the spread between U.S. Government Bonds and Japanese Government Bonds, making the U.S. Dollar a more attractive investment.

Last week, the USD/JPY settled at 106.571, up 0.636 or +0.60%.

Benchmark U.S. Treasury yields surged to seven-week highs last week after the Treasury sold a record amount of 30-year bonds to weak demand. In this sale, the Treasury moved $26 billion in bonds, up from $22 billion at its last quarterly refunding in May.

The debt sold at a high yield of 1.406%, around three basis points higher than were the debt traded before the sale. Primary dealers took a larger than average share of 28% of the bonds, indicating tepid demand from investors. The bid-to-cover ratio of 2.14 times was the lowest since July 2019.

The Treasury last week increased auction sizes across the curve and said that it plans to continue to shift more of its funding to longer-dated debt in coming quarters as it finances measures to offset the impact of the coronavirus epidemic.

Aussie Dollar Firms after RBA Governor Lowe Reiterates Need for Fiscal Support

After trading sideways-to-lower most of the week, the Australia firmed enough on Friday to finish the week higher. The catalyst behind the strength were comments from Reserve Bank of Australia (RBA) Governor Philip Lowe.

Last week, the AUD/USD settled at .7173, up 0.0030 or +0.42%.

Lowe called on all levels of government to “put all shoulders to the wheel” to fund the spending desperately needed to generate jobs and drag the economy out of its deepest recession in about a century.

Having slashed its cash rate to a record low 0.25% and implemented a bond buying program in mid-March, RBA Governor Lowe said there were limits to what monetary policy could do.

“The main game is going to be fiscal and structural policies, that’s the reality we face,” Lowe added.

Kiwi Pressured by Central Bank Talk of Sub-Zero Rates

The New Zealand Dollar was pressured last week by a bond rally that was sparked by the Reserve Bank of New Zealand (RBNZ) promise to extend its own purchases and, this week, speed them up as well. Additionally, central bank policymakers talked about the possibility of sub-zero interest rates.

Last week, the NZD/USD settled at .6544, down 0.0084 or -1.27%.

The RBNZ last Wednesday held its official cash rate at 0.25% in a widely expected decision and expanded its large scale asset purchase (LSAP) programme to as much as NZ$100 billion ($65.39 billion).

The decision making committee said a package of additional monetary instruments must remain in active preparation, which includes negative interest rates, while purchases of foreign assets also remain an option.