Fundamental Forecast for JPY:Neutral
- Yen Strength Persists as NZD Extends Weakness, Oil Price Fails at $50.
- Japanese Yen Technical Analysis: Is the Rally Getting Overextended?
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This past week saw the Japanese Yen strengthen against most major currencies as risk aversion began to show across global markets. The noteworthy event for the week was USD/JPY falling below the key level of 110.00. This is an important psychological level for USD/JPY, and just ten pips below we have a key Fibonacci level at 109.90: The fact that prices were able to break and stay below this area is confluent zone of support notable, and will likely carry bearing into next week as markets’ focus shift towards a series of high-impact economic prints around-the-globe.
The big driver for the Yen has appeared to be one of risk aversion. On Tuesday, around Noon Eastern Time, U.S. President Donald Trump sent a tweet that triggered fears around the U.S. stand-off with North Korea regarding the DPRK’s nuclear ambitions. Shortly after this tweet was sent, risk assets like the S&P 500 and the Nasdaq 100, as well as Nikkei futures began to dip-lower. USD/JPY mirrored this movement, as Yen strength began to show and continued through the week and into Friday. The logic for why this correlation exists and why it played out this way is fairly logical: With the Bank of Japan being one of the ‘more dovish’ of the major Central Banks, the expectation is for the BoJ to remain pedal-to-the-floor with stimulus well into the end of Haruhiko Kuroda’s tenure next April. This backdrop produces a fairly comfortable environment for carry trades, as a very weak Yen with little hope of higher rates or tighter policy is used to finance positions in higher-yielding instruments, such as the U.S. Dollar. But if the prospect of losses on the trade eclipse that of the potential gain from the carry, traders are wise to ‘unwind’ those positions out of fear, aka, risk aversion; and this is what we’ve seen through this past week.
