Downside Prospects in USDJPY: Caution Advisable?
The price action in Asia on JPY (USDJPY, EURJPY) may give traders in Europe something to think about on Wednesday following Tuesday’s move higher for the Japanese currency. That move was essentially occasioned by Italy-related concerns prompting safe haven demand for the yen versus the euro at the same time as those same concerns around Italy fed capital moves out of Europe and into US Treasuries, pressuring UST yields and by extension making the USD somewhat less attractive against Japan’s currency. What was notable about the tone of analyst commentary late Tuesday was the emphasis on the potential for further yen appreciation with USDJPY having traded below its 100 day moving average, then at 108.20. Yet Asia took USDJPY higher. Perhaps Japanese importers thought the quick fall in USDJPY offered good levels to add hedges while Japanese exporters drew the opposite conclusion.
Perhaps the tick higher in US 10-year yields made traders less minded to sell USDJPY at the base of its recent fall. Perhaps traders were mindful that with USD1.2 yards of option expiries today (1500h UK time) at 108.00-15 and USD1.3 billion at 109.00, the balance of interest favoured a spot level somewhere between the two. All these factors (and no doubt others) will have influenced the grind higher in USDJPY. But there’s also a need to bring the narrative back to Italy. By definition any anxiety around the euro that leads to safe haven demand for the yen will impact EURJPY but it might only initially impact USDJPY. After all US economic prospects and yields are currently more attractive than Japanese ones. It might not suit those who have identified a possibility that USDJPY could drop quickly towards 105.00 but unease about the euro (which lies at the root of recent moves) may not necessarily be best expressed through a short USDJPY position.
Written by Neal Kimberley, External Currency Analyst.