Traders and investors across the world from Asia to Wall St taken out short positions on Japan’s currency for six straight weeks due to further signals that economic growth is slowing. This fuels the rumours that the central bank will maintain its record monetary stimulus.
However, global risk sentiment has eased as the U.S. and China seemingly are coming to a compromise in order to resolve their long-running trade dispute.
Economists have seen producer price inflation was near a two-year low in March. A survey from The Bank of Japan released last week showed manufacturers’ confidence tanked to the lowest in six years in the first quarter, while the government is set to increase sales taxes from 8% to 10% towards the end of the year in Q4.
To add salt into the wounds the yield on U.S. Treasuries over Japanese government bonds fell to the lowest in more than a year during the month of March. Interestingly, a more important factor than the yield spread appears to be investment flows. Japanese investors bought a net 7.85 trillion yen ($70.3 billion) of overseas stocks and bonds this year in Q1, compared with 20.1 trillion yen they sent abroad last year, according to Ministry of Finance data.
“The dollar tends to be supported during this time of the year as Japanese investors are expected to allocate more of their funds abroad,” said Bart Wakabayashi, Tokyo branch manager at State Street Bank & Trust Co. “These seasonal flows are expected to keep the yen under pressure. USD/JPY could weaken toward 112.30,” he said.
The yen has fallen 2.8% against the (US) dollar over the past three months to trade at 111.67 per dollar late on Friday in Tokyo. If it drops below 112.14 that would officially put it at the weakest this year. Generally, technical analysis remains bearish. The dollar-yen currency pair has rallied after dropping to support at around 110 at the end of March. Numerous technical indicators (lagging and leading) suggest there is room for the US dollar to strengthen further.
Against the Pound
If there’s one currency you can rely on to be weaker than almost any other G7 currency it’s the British Sterling. The Pound Japanese Yen (GBP/JPY) exchange rate is down today and is currently trading around ¥145.3200. The Yen (JPY) gained against the Pound (GBP) today following the publication of the Japanese trade balance figures for February, which rose above expectation to ¥489.2bn. However, the Japanese Consumer Confidence Index figures for March fell further into contraction today at 40.5. Fears that the Japanese economy could sink into a recession are running high following the Bank of Japan (BOJ) announcing its most downbeat view in six years, which focused on regional economies.
We have had to cut our assessments on exports and output for some regions because we’re hearing more complaints about the impact of the global economic slowdown than three months ago.
Back to politics
Sterling has, however, fallen against the Japanese Yen today despite renewed hopes that cross-party talks between the Conservatives and Labour could break the Brexit deadlock.
The Pound, however, has struggled to gain against the Japanese Yen due to “materially increased fears of a no-deal” – Mark Carney’s words of the Bank of England. Brexit continues to haunt UK markets ahead of the proposed leaving day this Friday, 12 April. It seems a longer extension to May 22nd is likely but at the subject of the EU’s approval. Pound traders will be looking ahead to Wednesday this week, with the emergency EU summit due to discuss Brexit. If a deal is reached it’s expected a boost to the pound by 3% but if nothing is agreed and a delay continues its thought the pound could cool by 5%. Any indications that the EU could extend Article 50 would reduce the likelihood of a no-deal Brexit, and benefit the GBP/JPY exchange rate.
Many Sterling traders will be paying close attention to the House of Lords Monday which will conclude its examination of a bill from the Labour MP Yvette Cooper and Tory Sir Oliver Letwin, which would force Theresa May to consult with Parliament over any possible delays to Brexit.
Japanese Yen traders will be awaiting tomorrow’s publication of those Japanese machinery orders figures for February, which are expected to improve. After the release of this data, an important speech by the BoJ’s Governor, Haruhiko Kuroda, and any indications that a tax hike could be postponed could weaken the JPY/GBP exchange rate.