Improving Japanese Yen outlook weighs on USD/JPY, GBP/JPY and others

  • Emerging Consensus Suggests USD/JPY Has Peaked
  • Faltering Risk Appetite and Economies Take the JPY Short
  • Could keep GBP/JPY, AUD/JPY and others on their feet

Image © Leonid Andronov, Adobe Stock

The yen hit month-to-month highs against the dollar this week, but a brighter outlook for the Japanese economy and currency could see it put an additional burden on USD/JPY, GBP/JPY and others. others in the weeks and months to come.

The Japanese currency was trading near its highest level against the U.S. dollar since mid-April on Thursday, as it recovered ground previously lost to the pound and other currencies during an early rally. hectic year for the yen.

Both domestic and international factors helped lift the Japanese currency while pushing GBP/JPY down more than 5% from its April highs, although there is an emerging consensus among analysts suggesting that the yen’s rally could still last.

“The yen is the best performing currency following comments from BoJ Governor Kuroda on a possible exit from monetary easing,” said Elias Haddad, senior currency strategist at Commonwealth Bank of Australia.

Above: USD/JPY at daily intervals alongside GBP/JPY and with Fibonacci retracements of various extended rallies indicating potential areas of technical support for the dollar and resistance for the yen. Click on the image for a more detailed inspection.

The yen received another boost on Wednesday after Bank of Japan (BoJ) Governor Haruhiko Kuroda reportedly referred in parliament to a possible end to the bank’s longstanding monetary stimulus programs, as if that could soon be on the BoJ’s political agenda.

Any eventual decision to reduce the levels of stimulus provided to the economy would almost undoubtedly change the way financial markets view and value the yen, although this emerging outlook is not the only source of support currently helping Japan. currency.

Indeed, almost as notably for USD/JPY, US government bond yields have started to decline from recent highs in line with economists’ expectations for the US and global economies, which could possibly have binding implications. for the Federal Reserve (Fed) interest rate outlook. .

“In the crossovers, the JPY moves tell us that yesterday’s USDJPY decline was only briefly related to the JPY strengthening and more to the weakening USD,” said John Hardy, chief strategy officer at exchange at Saxo Bank, after suggesting on Wednesday that clients are looking for USD/JPY to slide to 125.

Above: USD/JPY at daily intervals with spread or spread between US and Japanese 10-year government bond yields. Click on the image for a more detailed inspection.

The significant rise in US government bond yields and the resulting speculation in the currency market, which drove USD/JPY higher in March and April, tightened financial conditions in the United States and elsewhere in the world. world, while weighing heavily on the US and global economies.

This comes at a time when speculative traders in the FX market are widely believed to be heavily exposed to bets against the safe-haven Japanese Yen through bullish bets on USD/JPY that could be forced into capitulation. by a myriad of factors over the weeks and months. ahead.

“We believe the factors that drove the yen to deeply depressed levels are changing, and the currency therefore offers an attractive asymmetry. More importantly, there are signs that tighter financial conditions in the United States have started to bite, with further weakness in housing and manufacturing data over the past week, and a further increase in claims. initials of unemployment,” said Zach Pandl, co-head of global exchange. strategy at Goldman Sachs.

“If U.S. financial conditions have already tightened enough to generate a major downturn, Fed officials could be content to raise rates roughly in line with current futures – and there would be less risk of rate hikes from the Fed if the economy slows rapidly. Meanwhile, Japan itself should see improved growth in the coming quarters,” Pandl and colleagues wrote in a research briefing last Friday. .

Above: USD/JPY and AUD/JPY at weekly intervals with the spread between US and Japanese 10-year government bond yields. Click on the image for a more detailed inspection.

Goldman Sachs recently cited a setback coronavirus for an improving Japanese economic outlook just as other advanced economies begin to creak under the twin strains of inflation hitting multi-decade highs and financial conditions. more stringent as a result of central bank policy actions.

This divergent growth outlook is something that could further bolster the Japanese currency’s appeal as a safe haven, and even more so if the Bank of Japan reacts to the anticipated economic recovery and rising inflation levels, by signaling that its monetary policy could change as an outcome.

This in turn is something that could reinforce USD/JPY’s nascent slide, which is part of why Goldman Sachs is tipping the pair down to 123 or lower over the next 12 months, although this could also negatively impact GBP/JPY and other currencies against the Japanese Yen as well.

“Right now, the momentum of inertia is towards risk aversion. Luckily for us, the existing positioning in FX is aligned, as short positions in the JPY remain significant,” said Bipan Rai, North Head. American FX Strategy Manager at CIBC Capital Markets.

“Layer in the risks of a negative growth picture for China this quarter (which is also bearish on the AUD), and the fundamental backdrop supports the short position on the AUD/JPY. Technicals also look clean,” Rai said on Thursday after suggesting that CIBC clients are looking for a drop to 85.80 in AUD/JPY.

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