USD/JPY stable as global risks rise and bullish bets on yen soar

USD/JPY stable as global risks rise and bullish bets on yen soar
Written by:
Crispus Nyaga
23rd May, 14:44
  • The USD/JPY pair was relatively stable last week as global risks rose.
  • Some of the risk include the confrontation between China and the US and no-deal Brexit.
  • Data from the CFTC show that most hedge funds have increased their bullish bets on the Japanese yen.

The USD/JPY pair declined from its weekly high of 108.04 to a low of 107.35 last week reflecting the stability of the Japanese yen as global risks emerge. Data from the CFTC also show that hedge funds remain solidly bullish on the Japanese yen.

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Japanese yen
USD/JPY stable as global risks emerge

USD/JPY stable as risks emerge

The Japanese yen has been relatively stable this year. In total, the currency has gained by about one per cent against the US dollar. In contrast, the euro, sterling, and Australian dollar have declined by 2.5 per cent, 9 per cent, and 7 per cent, respectively.

The strength of the yen has happened despite of the overall weakness of the Japanese economy, which started before the coronavirus pandemic. The country’s economy contracted by more than 7 per cent in the fourth quarter of 2019 and by more than 3 per cent in the first quarter. Analysts expect it to contract further in the second and third quarters of this year.

So, why has the USD/JPY pair been relatively stable? The answer is that the yen – and the Swiss franc – is viewed as a safe haven currency. While the reason for this are disputed, analysts cite the country’s foreign ownerships. For example, Japan is the biggest holder of US treasuries. According to Statista, it holds treasuries worth more than $1.2 trillion followed by China, which holds about $1 trillion.

Global risks have been growing. For example, the risks of a trade war between China and the United States have increased recently. Also, the decision by China to bypass Hong Kong legislature and impose security laws risks more protests. Other key risks are a no-deal Brexit, global recession, and another financial crisis in the eurozone.

Japan slides into a deflation

Japan has been hurt significantly by the current coronavirus pandemic. More than 16,000 people have been infected with the disease leading to a nationwide state of emergency. The exports and manufacturing PMIs have declined to historic lows and there is a possibility that the country will slide into a depression.

According to the Japan Times, the government expects to lift the state of emergency this Monday.

The USD/JPY pair was eerily calm yesterday, even after data from the statistics office showed that the country had slid into a deflation.

The national Consumer Price Index (CPI) declined by 0.2 per cent in April, the lowest it has been in years. Ut rose by just 0.1 per cent on a year on year basis. This number is significantly lower than the BOJ target of 2 per cent.

The closely-watched core CPI dropped by 0.2 per cent on a year on year basis and by 0.1 per cent on a monthly basis.

Perhaps, it is these weak numbers that the BOJ decided to intervene yesterday. In an emergency meeting, the bank decided to leave interest rates unchanged at minus 0.1 per cent. The members also pledged to intervene to ensure that the yield of Japanese Government Bonds (JGBs) remains at 0 per cent.

Most importantly, the bank announced additional liquidity measures to help cushion small and medium enterprises in Japan. It will achieve this by providing billions of dollars of loans to banks to help them lend to these companies.

Hedge funds remain bullish on the yen

With global risks rising, hedge funds and other speculators are increasing their bullish positions on the Japanese yen. That is according to the Commitment of Traders (CoT) report released by the Commodity and Futures Trading Commission (CFTC).

The data showed that the net positions on yen rose from the previous 22.4k to 27.5k. This means that most of these speculators believe that the yen will continue to rise. At the same time, they have increased their short exposure to the Australian dollar, Brazilian real, New Zealand dollar, Canadian dollar, and the British pound.

USD/JPY technical outlook

USD/JPY technical forecast

The USD/JPY ended the week at 107.63, which is significantly below the YTD high of 112.21. On the daily chart, the price is along the 38.2 per cent Fibonacci retracement level. It is also along the 50-day EMA and slightly below the 100-day EMA. Similarly, the price has broken above the resistance level shown in pink. Therefore, there is a possibility that the USD/JPY pair will resume the downward trend as bears attempt to test the 50 per cent retracement at 106.50.

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