Date: 05 Jul 2017

Risk aversion, related to the latest North Korean missile launch, gave the Japanese yen a boost on Tuesday in the Asian session as weak dollar/yen longs (USDJPY) were liquidated. The issue for traders is whether the downside momentum is going to be maintained in USDJPY or whether the yen’s bounce will be short-lived. With that in mind, BNYMellon noted on Tuesday that, anyway, “the weaker-JPY story didn’t get off to a good start this week – the LDP’s election defeat on Sunday and calls for Mr Kuroda to step down on his term’s completion invoked a dash for safety, but the fact that USD/JPY rallied sharply yesterday suggests that investors are keen to use any retreat as a better level to get long.”

Of course, that doesn’t guarantee the currency market will take the same stance twice. Perhaps traders might wish to consider how the North American market could look at the situation as US traders return after the July 4 holiday. While acknowledging that “the reinforced notion of the JPY’s safe haven status [post-Global Financial Crisis] may have disrupted a 60% plus weekly correlation between USD /JPY and the two year UST/JGB spread that goes all the way back to the start of the Millennium,” BNYMellon notes that “the spread is on the rise (10bp since the end of June), and near-term support for the USD could be sustained if we continue to see a further steepening in the US yield curve.” The yen may have had a bounce, there is event risk around Friday’s US jobs data and indeed the G20 meeting, but BNYMellon thinks that technically “having left the 55, 100 and 200 days Moving Averages behind it, USD/JPY appears will be well placed to press on toward the May high at 114.35.” Let’s see.

Written by Neal Kimberley, External Currency Analyst.