What Happens When The Interest Rate Spread Goes Negative?
This is not the first time in recent history that US interest rates have fallen below Japanese levels. In the past 40 years, this has happened at least 5 times. The most recent time was in 1993.
The following chart illustrates how USD/JPY performs whenever the interest rate spread between the US and Japan dips below zero. As you can see, it almost always precedes a sharp drop in USD/JPY that lasts can last for a number of months.
The US dollar continued to hit new decade lows against the Japanese Yen and is inching closer to my 85 target. As you can see in the chart below, there is no support from here to 85. With US interest rates below Japanese rates, more adjustment is happening in USD/JPY.
I do not think we will see much yen strength past 85. Although the Bank of Japan will not physically interven in the currency market anytime soon, verbal intervention may be on its way.
Also, Fed fund futures suggest that we may have seen the last interest rate cut from the Federal Reserve:
Kathy Lien is Director of Currency Research at GFT, and runs KathyLien.com.
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