Pro Perspectives 8/14/23





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August 14, 2023

The U.S. 10-year yield closed at 4.20% today. That makes ten consecutive days with a close above 4%.
As we've discussed often here in my daily notes, this 4% level has tended to bring about fireworks in the global financial system, which has tended to be countered with some form of intervention.
With that, the last time the 10-year yield spent this much time, at this high a level (October of 2022), the Bank of Japan was forced to intervene in the currency market. 
The widening spread between U.S. and Japanese yields was creating a rapid fall in the value of the yen (to 24-year lows against the dollar).  And as you can see in the chart below, the dynamic is back at work (the orange line higher represents a stronger dollar, weaker yen) …
This makes the Japanese inflation report later this week, maybe the most important event of the week.  A rapidly weakening yen doesn't help inflation that's running well north of the Bank of Japan's 2% target.  And that's making BOJ monetary policy, which still includes negative rates and QE, harder and harder to justify.
That said, Western world central banks need Japan to continue to print money, to be a buyer of global assets (which suppresses global market interest rates, and serves as a liquidity offset, to a degree, to the global tightening). 
It's worth noting that the intervention episodes (including BOJ intervention) of the past year, successfully resolved the pressure in the financial system created by 4%+ yields.  Yields went back down, and that resulted in a lower dollar, higher stocks and higher commodity prices (a generally better risk environment).