The Japanese Yen (JPY) attracts intraday sellers after touching a nearly two-month top against its American counterpart earlier this Thursday and currently trades near the lower end of its daily range. Worries that Japan would also be an eventual target for US President Donald Trump's trade tariffs and the risk-on mood turn out to be key factors undermining the safe-haven JPY. Apart from this, a modest US Dollar (USD) rebound from over a one-week low assists the USD/JPY pair to climb back above mid-153.00s in the last hour.
Any meaningful JPY depreciation, however, seems elusive in the wake of the growing acceptance that the Bank of Japan (BoJ) would hike interest rates further. Adding to this, bets that the Federal Reserve (Fed) will stick to its easing bias, which would result in the narrowing of the rate differential between Japan and the US, should act as a tailwind for the lower-yielding JPY. This, in turn, favors the JPY bulls and warrants some caution before confirming that the USD/JPY pair has bottomed out and positioning for further intraday gains.
From a technical perspective, the overnight breakdown and close below the 152.50-152.45 confluence – comprising the 100- and the 200-day Simple Moving Averages (SMAs) was seen as a fresh trigger for bearish traders. A subsequent fall below the 152.00 mark validates the negative outlook and suggests that the path of least resistance for the USD/JPY pair remains to the downside. Given that oscillators on the daily chart are still away from being in the oversold zone, spot prices could slide further toward the 151.50 intermediate support en route to the 151.00 mark and the 150.60 horizontal support.
On the flip side, an attempted recovery might now confront stiff resistance and remain capped near the 152.50 confluence support breakpoint. A sustained strength beyond, however, might trigger a short-covering rally and lift the USD/JPY pair beyond the 153.00 mark, toward testing the next relevant hurdle near the 153.70-153.80 region. This is closely followed by the 154.00 round figure, which if cleared might negate the negative outlook and shift the near-term bias in favor of bullish traders.
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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