Fundamental Analysis: Yen Weaker as Shares Recover

Fundamental Analysis: Yen Weaker as Shares Recover

The yen has made some losses against various currencies today as major indices continue their upward movements. Japanese data this morning was better overall; however, consumption is still fairly weak. Risk sentiment appears to have recovered somewhat since last week, also bringing some headwinds for the yen.

USDJPY has made a fairly big gain of about 80 sen from Friday’s lows. This symbol appears to be testing resistance around ¥108.65. The euro has also continued its upward movement today to about ¥122.78. On the other hand, the pound and Aussie dollar posted losses against the yen today to around ¥137.55 and ¥75.62 respectively.

Tariffs on Mexico scrapped

Much of the positivity in stock markets around the world today came from the news that American tariffs on Mexico would not take effect. Donald Trump announced on Twitter on Saturday morning GMT that his threat of a new 5% charge on many Mexican goods would be shelved.

Shares reacted very positively to the news, with many major indices including the Nikkei gaining more than half a percent in today’s session. The inverse correlation between Japan’s main index and currency has remained fairly strong overall this year.

The basic reason for the yen declining when the Nikkei gains is these instruments’ suitability for different levels of risk. Traders usually move towards havens and away from shares during periods of higher economic and political instability.

The most important data so far today was on Chinese trade. The country’s trade balance for May was about $42 billion, over double most estimates. This came amid a big decline over 8% in imports and fairly healthy growth of 1.1% in exports. Given the context of ongoing trade disputes, this sort of release from China can have a strong impact on sentiment in forex markets.

Some support for the yen from Japanese data

Last night GMT featured a number of important releases of economic data from Japan. On the whole, these were positive. Final quarterly GDP growth beat both the previous figure and expectations at 0.6%, as did the annual figure at 2.2%. On the other hand, Japan’s current account surplus was lower, although on track with expectations. Quarterly private consumption was also quite weak at negative 0.1%.

Considering the data for USDJPY specifically, the releases from Japan look quite good because of last week’s disappointing NFP. The figure of only 75,000 was significantly lower than expectations and the number for April.

Generally speaking, though, data is not a primary fundamental driver for USDJPY. Correlations and of course rates are more important. Losses for the pound and Aussie dollar against the yen recently can probably be explained by local events in these countries. There’s Brexit and the question of the next Prime Minister for the pound. The Aussie dollar meanwhile is probably the most vulnerable major currency to the Sino-American trade dispute, plus the RBA’s rate cut is still fairly recent.

Shares and trade to dominate this week

Shares will probably remain the biggest fundamental driver for the yen this week. Continuing upward movements by the Nikkei, Dow, FTSE and others would probably spur the yen lower.

Traders will also be watching the news of the trade war itself. Although another escalation on the part of Mr Trump seems to be unlikely, more threats from either side could drive demand for havens.

This isn’t a particularly big week in data from Japan. However, there are some important data points for paired currencies tomorrow morning. First up it’s National Australia Bank’s business confidence survey at 01.30 GMT, which could give some support to AUDJPY. Tomorrow’s most important release is claimant count change from the UK at 08.30. If the consensus of about 22,000 is correct, GBPJPY might also receive a degree of support.

Yen’s direction could be downward

Recovering risk sentiment and comparative stability on trade would suggest that the yen might continue to weaken somewhat over the next couple of days. That said, the recovery in shares is still in its early stages, so the yen’s fundamentals could change very quickly. Traders should also be aware of the technical picture for symbols with the yen.

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