Fundamental Analysis: Yen Gains on Trade and Growth Risks

Fundamental Analysis: Yen Gains on Trade and Growth Risks

The yen has made significant gains against many currencies today as a risk-off mood returns to most markets. More tension over trade this week has combined with today’s news of much lower forecasts for growth in the EU. These factors have driven demand for havens.

Dollar-yen has weakened to about ¥110.46 at the time of writing, although it remains above yesterday’s lows. The euro and the pound also fell to around ¥123.55 and ¥144.18 respectively. Conversely, the Aussie dollar managed to hold some of this morning’s gains at about ¥77.40.

More trade tension and signs of weaker growth

Probably the main fundamental factor driving the yen upward this week is the possibility of the collapse or postponement of Sino-American trade talks. Donald Trump’s threat of more tariffs against China over the weekend put at least the immediate future of the talks in some doubt. Shares around the world reacted accordingly by retreating, especially the Nikkei 225. These events have caused demand for havens in general to some degree, but particularly for the yen.

Earlier this afternoon GMT, the European Commission cut its growth forecasts for the eurozone. The forecast for growth in Germany’s GDP was halved to 0.5%, against the previous 1.1% three months ago. The Commission noted in accompanying comments that Germany, the eurozone’s largest economy, nearly entered recession in the last quarter of 2018. It also warned that trade disputes are likely to affect growth for some time to come.

Expectations of lower growth in the eurozone have contributed significantly to demand for the yen. This is because JPY usually reacts positively to economic uncertainty. In some of its pairs, though, gains have been fairly limited due mainly to rate differentials. The most important of these are USDJPY and AUDJPY, for which the differentials are likely to remain 2.35-2.6% and 1.6% respectively for at least the next few months.

Diplomacy and data in focus this week

Many traders of the yen and other currencies besides will be studying comments on trade from American and Chinese leaders over the next few days. Chinese Vice Premier Liu He is still due to hold talks in Washington on Thursday and Friday. However, if discussion breaks down completely and Mr Liu cancels his trip, strong gains for the yen could be among the results.

The Bank of Japan will release minutes from its latest policy meeting at 23.50 GMT tonight. No surprises are likely here, but the yen might be volatile around the time of the news. After this, the key data affecting the yen tomorrow comes from China. The world’s second economy releases April’s figures on trade at 03.00 GMT: balance of trade plus yearly change in imports and exports. Lower figures in line with the consensus could mean support for the yen.

More gains possible, but watch for overbought

The fundamental outlook overall is supportive for the yen this week in the absence of major new developments. On the other hand, any more gains for JPY would probably be small. All major yen pairs are oversold on H1 at the time of writing except for AUDJPY.

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