The USD has fallen heading into the FOMC meeting and awaits news on whether Yield Curve Control (YCC) will take place.
What is Yield Curve Control?
Yield Curve Control is when the Federal Reserve buys bonds of a specific maturity in order to keep the yield at a pre-determined level. They do this by purchasing the bonds using the QE program which pushes the price of bonds higher and, importantly, keeps the yields lower.
Why do this?
This control is done to keep borrowing costs low so that consumers and businesses are not under unnecessary strain. Low yields means lower borrowing costs which should in theory stimulate growth. The NFP data on Friday meant that there is a chance that business returns to normal too quickly. The break out in the 10 year Treasury bonds highlights the risk. The Fed will get nervous if rates look like returning higher, especially with large levels of borrowing. By controlling the curve you can contain that pressure to hike rates.
Who else has done this?
Other central banks have enacted this. The RBA has announced yield curve control on March 19. It set a target for the yield on three-year Australian government bonds of around 0.25% in line with its benchmark policy rate. The Bank of Japan keeps their 10 yield bond yield at around zero. . Lower yields on bonds make it easier for Gov’t’s to fund their shortfalls and with Gov’t debts rising around the world, this makes sense for Gov’t’s to do, Control the curve, keep costs low.
What happens if Yield Curve Control is used?
It should be USD negative as the yield advantage of the USD is kept in check. This is one of the reasons the USD is falling ahead of the FOMC.
However, If the Federal Reserve are positive about the US economy after the better than expected NFP data from last Friday, and omit YCC, then the USD should rally.
Gold and silver are looking to be a big beneficiary of the Fed using yield curve control and gold and silver buyers are expected on the announcement tonight if they put YCC into place. Above is a look at the silver chart and where bulls will target if the FOMC put YCC into place.