Japanese Yen benefits from the global flight to safety, subdued US Dollar demand


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  • The Japanese Yen attracts some haven flows and reverses a part of its overnight losses against the USD. 
  • Dovish Fed expectations keep the USD bulls on the defensive and exert pressure on the USD/JPY pair.
  • Mixed BoJ signals might hold back traders from placing directional bets ahead of the key US macro data.

The Japanese Yen (JPY) recovers a part of its overnight losses and remains on the front foot against the US Dollar (USD) during the early European session on Tuesday. The global risk sentiment took a hit after an attack on US vessels in the Red Sea over the weekend fueled worries about a broader conflict in the Middle East. Apart from this, a darkening global outlook and the worsening economic conditions in China temper investors' appetite for riskier assets. This is evident from a generally weaker tone around the equity markets and is seen benefitting traditional safe-haven currencies, including the JPY. 

The USD, on the other hand, struggles to capitalize on the overnight rise to a one-week top amid growing acceptance that the Federal Reserve (Fed) is done raising interest rates and may begin easing its policy as early as March 2024. The dovish outlook triggers a fresh leg down in the US Treasury bond yields and acts as a headwind for the Greenback. This, in turn, keeps a lid on the USD/JPY pair's recovery from a near three-month low touched on Monday and attracts fresh sellers near a technically significant 100-day Simple Moving Average (SMA). The intraday downtick, however, lacks follow-through.

Bank of Japan (BoJ) board members last week downplayed speculations of an imminent shift in the policy stance and ending the negative interest rate regime. Adding to this, data released this Tuesday showed that consumer inflation in Tokyo – Japan's capital city – eased more than expected in November. This might hold back bulls from placing aggressive bets around the JPY and help limit losses for the USD/JPY pair. Traders now look to the US economic docket, featuring the release of the ISM Services PMI and JOLTS Job Openings data for some impetus, though the focus remains on the NFP report on Friday.

Daily Digest Market Movers: Japanese Yen is back in demand amid risk-off and bets for a BoJ policy shift

  • Data released this Tuesday showed that the headline Tokyo CPI decelerated from 3.3% to the 2.6% YoY rate in November, though it remained above the Bank of Japan's 2% target for the 18th consecutive month.
  • The Core CPI, which excludes volatile items such as fresh food, was flat month-on-month and the yearly rate eased more than anticipated, from 2.7% in October to 2.3% during the reported month.
  • Another core gauge, which excludes both fresh food and fuel prices and is used as an indicator of underlying inflation by the BoJ, fell from the 3.8% YoY rate in the prior month and came in at 3.6%.
  • Investors, however, continue to price in the possibility of an exit from negative interest rate policy by the BoJ in 2024, which, along with a softer risk tone, lends some support to the Japanese Yen.
  • The final au Jibun Bank Service PMI came in at 50.8 for November, below the flash reading of 51.7. This was the slowest pace of growth in a year, signalling a further loss of momentum in the services sector.
  • An escalation of geopolitical tensions in the Middle East tempers investors' appetite for riskier assets while the overnight rebound in the US bond yields took its toll on tech stocks.
  • Bets that the Federal Reserve may begin easing as soon as March 2024 cap the US bond yields and the recent US Dollar recovery from a multi-month low, acting as a headwind for the USD/JPY pair.
  • Investors now look forward to the release of the US ISM Services PMI for some impetus later during the North American session, though the focus will remain on the closely-watched NFP report on Friday.

Technical Analysis: USD/JPY hangs near three-month low set on Monday,  not out of the woods yet

From a technical perspective, the USD/JPY pair on Monday found some support and attracted buyers near the 146.20 region, representing the 38.2% Fibonacci retracement level of the July-October rally. The subsequent move up, however, fails to make it through the 100-day Simple Moving Average (SMA) pivotal support breakpoint, warranting some caution for bullish traders. That said, a sustained strength beyond could trigger a short-covering rally and allow the USD/JPY pair to reclaim the 148.00 mark. The momentum could get extended further, though is likely to remain capped near the 148.25-148.30 horizontal barrier.

On the flip side, weakness back below the 147.00 mark might expose the multi-month low, around the 146.20 region, or the 38.2% Fibo. level tested on Monday. Some follow-through selling, leading to a subsequent slide through the 146.00 mark, will be seen as a fresh trigger for bearish traders. The USD/JPY pair might then accelerate the fall towards the next relevant support near the 145.45-145.40 region en route to the 145.00 psychological mark and the 50% Fibo. level, around mid-144.00s.

Japanese Yen price this week

The table below shows the percentage change of Japanese Yen (JPY) against listed major currencies this week. Japanese Yen was the weakest against the US Dollar.

  USD EUR GBP CAD AUD JPY NZD CHF
USD   0.44% 0.60% 0.44% 1.06% 0.52% 0.81% 0.52%
EUR -0.46%   0.16% 0.00% 0.62% 0.06% 0.39% 0.08%
GBP -0.62% -0.15%   -0.16% 0.46% -0.08% 0.21% -0.08%
CAD -0.44% 0.01% 0.17%   0.61% 0.06% 0.38% 0.08%
AUD -1.07% -0.63% -0.45% -0.62%   -0.57% -0.25% -0.55%
JPY -0.55% -0.05% 0.25% -0.05% 0.57%   0.32% 0.00%
NZD -0.82% -0.37% -0.22% -0.38% 0.24% -0.30%   -0.29%
CHF -0.54% -0.07% 0.08% -0.08% 0.55% 0.00% 0.30%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

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.

What are the key assets to track to understand risk sentiment dynamics?

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.

Which currencies strengthen when sentiment is "risk-on"?

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.

Which currencies strengthen when sentiment is "risk-off"?

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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