Lower Treasury Yields, U.S. Stocks Drive Japanese Yen Higher

Flight-to-safety buying sent the Japanese Yen to its highest level against the U.S. Dollar since April 20. The catalysts were escalating concerns over a possible military conflict between the United States and North Korea and weaker-than-expected U.S. inflation data.

For the week, the USD/JPY settled at 109.153, down 1.511 or -1.37%.

A sharp decline in U.S. Treasury yields weakened the U.S. Dollar, tightening the spread between U.S. government bonds and Japanese government bonds. This made the dollar a less attractive investment.

U.S. equity markets also sold-off hard, affecting the carry-trade. Investors liquidating stocks were forced to buy Japanese yen in order to pay off loans from Japanese banks.

The USD/JPY was also pressured late in the week by a report that showed disappointing U.S. consumer inflation data. U.S. consumer inflation remained soft for the fifth straight month in July, raising more doubts about whether inflation will eventually rise to hit the U.S. Federal Reserve’s 2% annual rate target.

AUDUSD

The Australian Dollar drifted sideways-to-lower most of the week until Friday’s release of the disappointing U.S. CPI data triggered a short-covering rally.

The AUD/USD settled the week at .7890, down 0.0038 or -0.48%.

Bearish traders continued to respond to the previous week’s dovish Reserve Bank of Australia monetary policy decision. Also pressuring the Aussie was disappointing trade balance data from China.

In Australian economic data, the AIG Construction Index came in slightly above expectations. The ANZ Job Advertisements report showed an increase of 1.5%.

Westpac Consumer Sentiment was a disappointing -1.12%. Home loans also came in under expectations with an increase of 0.5%, below the 1.5% estimate and 1.1% previous read.

Helping to support the AUD/USD late in the week was the weaker-than-expected U.S. Producer Price Index and the disappointing U.S. Consumer Price Index reports. Both helped reduce the chances of a Fed rate hike later this year, helping to underpin the Aussie Dollar against the U.S. Dollar.

NZD/USD

The New Zealand Dollar was under pressure all week due to domestic factors, but managed to mount a turnaround late in the week after the U.S. reported weaker-than-expected inflation news.

The NZD/USD settled at .7311, down 0.0101 or -1.36%.

The Reserve Bank of New Zealand left the official cash rate at 1.75 percent, a move widely expected by financial markets. However, the central bank is still indicating it expects to begin raising the benchmark OCR from next year.

Governor Graeme Wheeler said economic growth was expected to pick up in the coming months, supported by strong net migration, low interest rates and spending outlined in the May Budget.

Wheeler also said headline inflation was likely to decline and the outlook for tradables inflation was weak.